A MERTON-MODEL APPROACH TO ASSESSING THE DEFAULT RISK OF UK PUBLIC COMPANIES

M. Tudela () and Garry Young
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M. Tudela: Bank of England, Threadneedle Street, London, EC2R 8AH, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 06, 737-761

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.

Keywords: Merton models; corporate failure; default probabilities (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (11)

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Working Paper: A Merton-model approach to assessing the default risk of UK public companies (2003)
Working Paper: A Merton Model Approach to Assessing the Default Risk of UK Public Companies (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:08:y:2005:i:06:n:s0219024905003256

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DOI: 10.1142/S0219024905003256

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