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A Merton-model approach to assessing the default risk of UK public companies

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  • Merxe Tudela
  • Garry Young

Abstract

In this paper it is shown 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. Power curves and accuracy ratios are also examined. It is shown that there is much useful information in the Merton-style estimates.

Suggested Citation

  • Merxe Tudela & Garry Young, 2003. "A Merton-model approach to assessing the default risk of UK public companies," Bank of England working papers 194, Bank of England.
    • Handle: RePEc:boe:boeewp:194
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp194.pdf
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    References listed on IDEAS

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    More about this item

    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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