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A Merton-Model Approach To Assessing The Default Risk Of Uk Public Companies

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Author Info
M. TUDELA () (Bank of England, Threadneedle Street, London, EC2R 8AH, UK)
G. YOUNG () (Bank of England, Threadneedle Street, London, EC2R 8AH, UK)

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Abstract

This paper shows how a Merton-model approach can be used to develop measures of the probability of failure of individual quoted UK companies. Probability estimates are then constructed for a group of failed companies and their properties as leading indicators of failure assessed. Probability estimates of failure for a control group of surviving companies are also constructed. These are used in probit regressions to evaluate the information content of the Merton-based estimates relative to information available in company accounts and in assessing Type I and Type II errors. We also look at power curves and accuracy ratios. The paper shows that there is much useful information in the Merton-style estimates.

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Publisher Info
Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 08 (2005)
Issue (Month): 06 ()
Pages: 737-761
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Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:06:p:737-761

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Related research
Keywords: Merton models; corporate failure; default probabilities;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Briys, Eric & de Varenne, Fran?ois, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June. [Downloadable!]
  2. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May. [Downloadable!] (restricted)
  3. John G. Cragg & Russell S. Uhler, 1970. "The Demand for Automobiles," Canadian Journal of Economics, Canadian Economics Association, vol. 3(3), pages 386-406, August. [Downloadable!] (restricted)
  4. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November. [Downloadable!] (restricted)
  5. Saikat Nandi, 1998. "Valuation models for default-risky securities: An overview," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 22-35. [Downloadable!]
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  7. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Petr JAKUBÍK, 2007. "Macroeconomic Environment and Credit Risk (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 60-78, March. [Downloadable!]
  2. Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers 18/2004, Bank of Finland. [Downloadable!]
  3. Alexandros Benos & George Papanastasopoulos, 2005. "Extending the Merton Model: A Hybrid Approach to Assessing Credit Quality," Finance 0505020, EconWPA, revised 03 Jun 2005. [Downloadable!]
  4. Georges Dionne & Sadok Laajimi & Sofiane Mejri & Madalina Petrescu, 2006. "Estimation of the Default Risk of Publicly Traded Canadian Companies," Cahiers de recherche 0613, CIRPEE. [Downloadable!]
    Other versions:
  5. Philip Bunn & Victoria Redwood, . "Company accounts based modelling of business failures and the implications for financial stability," Bank of England working papers 210, Bank of England. [Downloadable!]
  6. Mark J Manning, . "Exploring the relationship between credit spreads and default probabilities," Bank of England working papers 225, Bank of England. [Downloadable!]
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This page was last updated on 2009-12-1.

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