IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Mapping corporate drift towards default: Part 1: a market-based approach

Listed author(s):
  • Arindam Bandyopadhyay

Purpose - The purpose of this article is to discuss a Black-Scholes-Merton (BSM)-based market approach to quantify the default risk of publicly-listed individual companies. Design/methodology/approach - Using the contingent claim approach, a framework is presented to optimally use stock market and balance sheet information of the company to predict its probability of failure as well as ordinal risk ranking over a horizon of one year. Findings - By applying the methodology, yearly estimates of the risk neutral and real probability of default for 150 Indian corporates from 1998 to 2005 were constructed, that give up-to-date point-in-time perspective of their risk assessment. It was found that option model can provide ordinal ranking of companies on the basis of their default risk which also has good early warning predictability. Originality/value - The option-based default probability estimation may be an innovative approach for measuring and managing credit risk even in the emerging market economy. The asset value model developed in this paper based on the BSM model can facilitate the Indian banks as well as investors to get an early warning signal about the company's default status.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Access to full text is restricted to subscribers

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Emerald Group Publishing in its journal The Journal of Risk Finance.

Volume (Year): 8 (2007)
Issue (Month): 1 (January)
Pages: 35-45

in new window

Handle: RePEc:eme:jrfpps:v:8:y:2007:i:1:p:35-45
Contact details of provider: Web page:

Order Information: Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
Web: Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eme:jrfpps:v:8:y:2007:i:1:p:35-45. 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: (Virginia Chapman)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.