C选项

问题如下：

The head of quantitative analytics (HQA) of a bank is evaluating a proposal to change the bank’s default prediction process from predominantly relying on ratings from rating agencies to applying internal rating models that rely on statistical-based and structural approaches. As part of the proposal, the HQA needs to justify to the senior management the advantages of using these structural models for default prediction. Which of the following observations would the HQA be correct to make?

选项：

A.

When applying logistic regression models, the coefficients are estimated by the maximum likelihood estimation (MLE) method.

B.

The Merton model can be effectively applied to both private and publicly listed companies.

C.

The coefficients of linear discriminant analysis are estimated by the method of least squares.

D.

The KMV model includes equity and optionless long-term debt only, which can simplify the analysis of issuers with complex capital structures.

解释：

A is correct. In logistic regression, coefficients are estimated by using the ’maximum likelihood estimation’ (MLE) method.

B is incorrect. The Merton model has several limitations. It is applicable to liquid, publicly traded names only, and there is continuous need for calibration, which is costly for smaller banks. The Merton model relies on the continually changing movements in market prices, volatility, and interest rates.

C is incorrect. The coefficients of LDA are estimated by (1) maximizing the homogeneity around the two centroids and (2) minimizing the overlapping zone in which the two groups of borrowers are mixed and share similar Z-scores.

D is incorrect. The KMV model is a dynamic model that can be applied to issuers with complex capital structures. Equity, short-term debt, long-term debt, convertible debt are all included in the analysis of default prediction.