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Alternative bankruptcy prediction models using option-pricing theory

Author

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  • Charitou, Andreas
  • Dionysiou, Dionysia
  • Lambertides, Neophytos
  • Trigeorgis, Lenos

Abstract

We examine the empirical properties of the theoretical Black–Scholes–Merton (BSM) bankruptcy model. We evaluate the predictive ability of various existing modifications of the BSM model and extend prior studies by estimating volatility directly from market-observable returns on firm value. We show that parsimonious models using our direct market-observable volatility estimate perform better than alternative, more sophisticated, models. Our findings suggest the adoption of simpler modelling approaches relying on market data when implementing the BSM model.

Suggested Citation

  • Charitou, Andreas & Dionysiou, Dionysia & Lambertides, Neophytos & Trigeorgis, Lenos, 2013. "Alternative bankruptcy prediction models using option-pricing theory," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2329-2341.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2329-2341
    DOI: 10.1016/j.jbankfin.2013.01.020
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zvika Afik & Ohad Arad & Koresh Galil, 2012. "Using Merton model: an empirical assessment of alternatives," Working Papers 1202, Ben-Gurion University of the Negev, Department of Economics.
    2. repec:eee:proeco:v:193:y:2017:i:c:p:294-305 is not listed on IDEAS
    3. repec:eee:corfin:v:48:y:2018:i:c:p:680-699 is not listed on IDEAS
    4. Afik, Zvika & Arad, Ohad & Galil, Koresh, 2016. "Using Merton model for default prediction: An empirical assessment of selected alternatives," Journal of Empirical Finance, Elsevier, vol. 35(C), pages 43-67.
    5. Qunfeng LIAO & Seyed MEHDIAN, 2016. "Measuring Financial Distress And Predicting Corporate Bankruptcy: An Index Approach," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 17, pages 33-51, June.
    6. Doumpos, Michael & Niklis, Dimitrios & Zopounidis, Constantin & Andriosopoulos, Kostas, 2015. "Combining accounting data and a structural model for predicting credit ratings: Empirical evidence from European listed firms," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 599-607.
    7. Mariusz Górajski & Dobromił Serwa & Zuzanna Wośko, 2016. "Measuring expected time to default under stress conditions for corporate loans," NBP Working Papers 237, Narodowy Bank Polski, Economic Research Department.

    More about this item

    Keywords

    Bankruptcy prediction; Option-pricing theory; Volatility estimation;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G0 - Financial Economics - - General
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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