Corporate valuations and the merton model
AbstractIn recent years both practitioners and academics have realised that traditional discounted cash flow models erroneously consider the option value embedded in firms. Hence equity and debt valuation methodologies based on option theory have recently become quite popular. Such methodologies take inspiration from the Merton (1974) model which was originally introduced to measure the impact of default risk on corporate bonds yields. Thirty years later the Merton model for its simplicity and rigour remains unrivalled and is the basis of some of the most sophisticated credit risk models. In this paper it will be shown how practitioners often improperly adapt the Merton model for aims beyond its original scope.
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Bibliographic InfoPaper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0055.
Date of creation: Dec 2005
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Merton model; option pricing; default risk; corporate bond.;
Other versions of this item:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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- Marisa Cenci & Andrea Gheno, 2005. "Equity and debt valuation with default risk: a discrete structural model," Applied Financial Economics, Taylor & Francis Journals, vol. 15(12), pages 875-881.
- Merton, Robert C, 1974.
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- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- J. Mukuddem-Petersen & M. A. Petersen & I. M. Schoeman & B. A. Tau, 2008. "Dynamic modelling of bank profits," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(3), pages 157-161.
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