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Empirical Study Of The Probability Of Default In Case Of Romanian Companies Listed On Stock Exchange

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Author Info

  • Petru Tunde Petra

    ()
    (Babes-Bolyai University, Faculty of Economics and Business Administration)

  • Farkas Dalma - Zsuzsa

    (Babes-Bolyai University, Faculty of Economics and Business Administration)

  • Furdek Balazs - Marton

    (Babes-Bolyai University, Faculty of Economics and Business Administration)

  • Marton Noemi, Racz Timea Erzsebet

    (Babes-Bolyai University, Faculty of Economics and Business Administration)

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    Abstract

    The importance of estimation of a firm's probability of default increased significantly during the economic and financial crisis for financial institutions, which can be explained by the fact that the share of nonperforming loans increased in this period. The probability of default can be estimated with structural models, which have on base the methodology developed by Merton (1974), methodology used by Moody's Corporation (known as KMV Merton model). The aim of this study is to estimate the probability of default of companies listed on Bucharest Stock Exchange using this methodology. This approach was widely used in the literature by many researchers (i.e., Kealhofer and Kurbat (2000), Crosbie and Bohn (2002), Duffie and Wang (2004), Bharath and Shumway (2004, 2008)). In Romania this methodology was empirically tested by Codirlaşu (2007), who estimated using Merton's methodology the probability of default of companies listed on the Bucharest Stock Exchange, respectively by Bobircă et al. (2008), where the probabilities of default were estimated in case of 42 companies listed on the Bucharest Stock Exchange for 2000-2008 time period. In this paper we used Merton's model, which assumes that a company defaults if the value of its assets is less than the promised dept repayment at time T. The process of estimating the probability of default starts from the following firm specific variables: the market value of the firm's assets, the share prices, the value of the liabilities and the risk-free rate. The analyzed period is 2003-2010, containing the economic and financial crisis period, too. Analyzing the financial statements of the companies listed on the Bucharest Stock Exchange, we determined the input parameters of the model and calculated the quarterly probabilities of default of each analyzed company. According to our results the probabilities of default have a reduced value in the majority of the cases.

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    File URL: http://anale.steconomiceuoradea.ro/volume/2011/n1/048.pdf
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    Bibliographic Info

    Article provided by University of Oradea, Faculty of Economics in its journal The Journal of the Faculty of Economics - Economic.

    Volume (Year): 1 (2011)
    Issue (Month): 1 (July)
    Pages: 515-523

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    Handle: RePEc:ora:journl:v:1:y:2011:i:1:p:515-523

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    Related research

    Keywords: Merton model; probability of default; credit risk; structural models; companies listed on the stock exchange.;

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    1. Tudela, Merxe & Garry Young, 2003. "A Merton Model Approach to Assessing the Default Risk of UK Public Companies," Royal Economic Society Annual Conference 2003 207, Royal Economic Society.
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