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A Merton-Model Approach To Assessing The Default Risk Of Uk Public Companies

Author

Listed:
  • M. TUDELA

    (Bank of England, Threadneedle Street, London, EC2R 8AH, UK)

  • G. YOUNG

    (Bank of England, Threadneedle Street, London, EC2R 8AH, UK)

Abstract

This paper shows how a Merton-model approach can be used to develop measures of the probability of failure of individual quoted UK companies. Probability estimates are then constructed for a group of failed companies and their properties as leading indicators of failure assessed. Probability estimates of failure for a control group of surviving companies are also constructed. These are used in probit regressions to evaluate the information content of the Merton-based estimates relative to information available in company accounts and in assessing Type I and Type II errors. We also look at power curves and accuracy ratios. The paper shows that there is much useful information in the Merton-style estimates.

Suggested Citation

  • 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.
    • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:06:n:s0219024905003256
    DOI: 10.1142/S0219024905003256
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    More about this item

    Keywords

    Merton models; corporate failure; default probabilities;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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