A Merton Model Approach to Assessing the Default Risk of UK Public Companies
AbstractThis 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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Bibliographic InfoPaper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 207.
Date of creation: 04 Jun 2003
Date of revision:
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Merton models; corporate failure; implied default probabilities;
Other versions of this item:
- M. Tudela & G. Young, 2005. "A Merton-Model Approach To Assessing The Default Risk Of Uk Public Companies," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(06), pages 737-761.
- Merxe Tudela & Garry Young, 2003. "A Merton-model approach to assessing the default risk of UK public companies," Bank of England working papers 194, Bank of England.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-16 (All new papers)
- NEP-CFN-2003-06-16 (Corporate Finance)
- NEP-FIN-2003-06-16 (Finance)
- NEP-RMG-2003-06-16 (Risk Management)
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