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Empirical Study Of The Probability Of Default In Case Of Romanian Companies Listed On Stock Exchange

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  • Petru Tunde Petra

    () (Babes-Bolyai University, Faculty of Economics and Business Administration)

  • Farkas Dalma - Zsuzsa

    (Babes-Bolyai University, Faculty of Economics and Business Administration)

  • Furdek Balazs - Marton

    (Babes-Bolyai University, Faculty of Economics and Business Administration)

  • Marton Noemi, Racz Timea Erzsebet

    (Babes-Bolyai University, Faculty of Economics and Business Administration)

Abstract

The importance of estimation of a firm's probability of default increased significantly during the economic and financial crisis for financial institutions, which can be explained by the fact that the share of nonperforming loans increased in this period. The probability of default can be estimated with structural models, which have on base the methodology developed by Merton (1974), methodology used by Moody's Corporation (known as KMV Merton model). The aim of this study is to estimate the probability of default of companies listed on Bucharest Stock Exchange using this methodology. This approach was widely used in the literature by many researchers (i.e., Kealhofer and Kurbat (2000), Crosbie and Bohn (2002), Duffie and Wang (2004), Bharath and Shumway (2004, 2008)). In Romania this methodology was empirically tested by Codirlaşu (2007), who estimated using Merton's methodology the probability of default of companies listed on the Bucharest Stock Exchange, respectively by Bobircă et al. (2008), where the probabilities of default were estimated in case of 42 companies listed on the Bucharest Stock Exchange for 2000-2008 time period. In this paper we used Merton's model, which assumes that a company defaults if the value of its assets is less than the promised dept repayment at time T. The process of estimating the probability of default starts from the following firm specific variables: the market value of the firm's assets, the share prices, the value of the liabilities and the risk-free rate. The analyzed period is 2003-2010, containing the economic and financial crisis period, too. Analyzing the financial statements of the companies listed on the Bucharest Stock Exchange, we determined the input parameters of the model and calculated the quarterly probabilities of default of each analyzed company. According to our results the probabilities of default have a reduced value in the majority of the cases.

Suggested Citation

  • Petru Tunde Petra & Farkas Dalma - Zsuzsa & Furdek Balazs - Marton & Marton Noemi, Racz Timea Erzsebet, 2011. "Empirical Study Of The Probability Of Default In Case Of Romanian Companies Listed On Stock Exchange," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 515-523, July.
  • Handle: RePEc:ora:journl:v:1:y:2011:i:1:p:515-523
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    File URL: http://anale.steconomiceuoradea.ro/volume/2011/n1/048.pdf
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    References listed on IDEAS

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    1. repec:wsi:ijtafx:v:08:y:2005:i:06:n:s0219024905003256 is not listed on IDEAS
    2. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Merton model; probability of default; credit risk; structural models; companies listed on the stock exchange.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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