Estimation of default risk through Merton's distance to default model: an empirical study of four Indian Public Sector Banks

Raghavendra S. Bendigeri

International Journal of Business and Globalisation, 2024, vol. 37, issue 4, 535-554

Abstract: Credit risk or default risk is one of the most significant risks faced by every organisation. Inability to pay off its debts invariably leads the firm towards insolvency and bankruptcy. Management of credit risk through suitable safeguards is highly vital for any organisation to survive, sustain and thrive. However, comprehension and measurement of credit risk or default risk precedes its management. This research study makes an attempt to comprehend and quantify credit risk of four Indian Public Sector banks namely: Bank of Baroda, Bank of India, Canara Bank and Punjab National Bank. The research employs Merton's distance to default model to measure the credit risk of above-mentioned banks.

Keywords: credit risk; default risk; banks; Merton's model; distance to default; probability of default; asset value; equity value; asset volatility; equity volatility. (search for similar items in EconPapers)
Date: 2024
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