IDEAS home Printed from
   My bibliography  Save this article

The Use of the Merton Model to Quantify the Default Probabilities of the Top 42 Non-Financial South African Firms


  • Glen Holman
  • Ryan Van Breda
  • Carlos Correia

    () (University of Cape Town)


The objective of this paper is to quantify the default probabilities of the top 42 nonfinancial firms listed on the Johannesburg Stock Exchange. This paper follows the same methodology as outlined in the Moody’s KMV white papers in implementing the Merton (1974) model. The model of default prediction builds upon option theory as pioneered by Black-Scholes-Merton and derives the probability of default predominately from asset value, asset volatility and a firm’s leverage. The theoretical default probabilities of the top 42 listed non-financial firms are determined under base-case and worst-case scenarios and South African companies are generally found to have singularly low probabilities of default. This mainly reflects the low use of financial leverage by South African firms. This paper finds that there is weak correlation between Merton default probabilities and ratings issued by the rating agencies. The results of this paper indicate that the Merton (1974) model may, subject to limitations, be used as a source of information of the underlying credit risk of publicly traded firms in South Africa.

Suggested Citation

  • Glen Holman & Ryan Van Breda & Carlos Correia, 2011. "The Use of the Merton Model to Quantify the Default Probabilities of the Top 42 Non-Financial South African Firms," The African Finance Journal, Africagrowth Institute, vol. 13(Conferenc), pages 1-33.
  • Handle: RePEc:afj:journl:v:13:y:2011:i:conference:p:1-33

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Probability of default; Merton Model; Black-Scholes option pricing model; Distance to default; Moody's KMW; Ratings; Default point; Asset volatility;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:afj:journl:v:13:y:2011:i:conference:p:1-33. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kirk De Doncker). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.