A Merton-Model Approach To Assessing The Default Risk Of Uk Public Companies
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.
Volume (Year): 08 (2005)
Issue (Month): 06 ()
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