Mapping corporate drift towards default: Part 1: a market-based approach
Abstract
Purpose – The purpose of this article is to discuss a Black-Scholes-Merton (BSM)-based market approach to quantify the default risk of publicly-listed individual companies. Design/methodology/approach – Using the contingent claim approach, a framework is presented to optimally use stock market and balance sheet information of the company to predict its probability of failure as well as ordinal risk ranking over a horizon of one year. Findings – By applying the methodology, yearly estimates of the risk neutral and real probability of default for 150 Indian corporates from 1998 to 2005 were constructed, that give up-to-date point-in-time perspective of their risk assessment. It was found that option model can provide ordinal ranking of companies on the basis of their default risk which also has good early warning predictability. Originality/value – The option-based default probability estimation may be an innovative approach for measuring and managing credit risk even in the emerging market economy. The asset value model developed in this paper based on the BSM model can facilitate the Indian banks as well as investors to get an early warning signal about the company's default status.Download Info
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic Info
Article provided by Emerald Group Publishing in its journal Journal of Risk Finance.
Volume (Year): 8 (2007)
Issue (Month): 1 (January)
Pages: 35-45
Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
Handle: RePEc:eme:jrfpps:v:8:y:2007:i:1:p:35-45
Contact details of provider:
Web page: http://www.emeraldinsight.com
Order Information:
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
Email:
Web: http://www.emeraldinsight.com/jrf.htm
For corrections or technical questions regarding this item, or to correct its listing, contact: (Chris Harris).
Related research
Keywords: Corporate finances; Credit management; Default; Financial modeling; India; Risk analysis;References
No references listed on IDEASYou can help add them by filling out this form.
Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Bandyopadhyay, Arindam & Saha, Asish, 2008. "Assessment of Economic Capital: An Equity Market approach," MPRA Paper 9098, University Library of Munich, Germany.
Lists
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.Statistics
Access and download statisticsCorrections
When requesting a correction, please mention this item's handle: RePEc:eme:jrfpps:v:8:y:2007:i:1:p:35-45For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Harris).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.