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Alternative bankruptcy prediction models using option-pricing theory

Author

Listed:
  • Charitou, Andreas
  • Dionysiou, Dionysia
  • Lambertides, Neophytos
  • Trigeorgis, Lenos

Abstract

We examine the empirical properties of the theoretical Black–Scholes–Merton (BSM) bankruptcy model. We evaluate the predictive ability of various existing modifications of the BSM model and extend prior studies by estimating volatility directly from market-observable returns on firm value. We show that parsimonious models using our direct market-observable volatility estimate perform better than alternative, more sophisticated, models. Our findings suggest the adoption of simpler modelling approaches relying on market data when implementing the BSM model.

Suggested Citation

  • Charitou, Andreas & Dionysiou, Dionysia & Lambertides, Neophytos & Trigeorgis, Lenos, 2013. "Alternative bankruptcy prediction models using option-pricing theory," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2329-2341.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2329-2341
    DOI: 10.1016/j.jbankfin.2013.01.020
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    More about this item

    Keywords

    Bankruptcy prediction; Option-pricing theory; Volatility estimation;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G0 - Financial Economics - - General
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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