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A Merton Model Approach to Assessing the Default Risk of UK Public Companies

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  • Tudela, Merxe

    (Bank of England)

  • Garry Young

Abstract

This paper shows how a Merton-model approach can be used to develop measures of the probability of failure of quoted UK companies. Probability estimates are 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. The paper shows that there is much useful information in the Merton-style estimates.

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File URL: http://repec.org/res2003/Tudela.pdf
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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 207.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:207

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Keywords: Merton models; corporate failure; implied default probabilities;

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  1. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November.
  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.
  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.
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  5. Briys, Eric & de Varenne, Fran├žois, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June.
  6. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
  7. 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.
  8. Saikat Nandi, 1998. "Valuation models for default-risky securities: An overview," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 22-35.
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