סמינר במימון
Using Merton Model: An Empirical Assessment of Alternatives
Dr. Koresh Galil, Ben-Gurion University
Abstract
Merton (1974) structural model uses market equity timely information for default prediction. The literature describes several specifications for the model application, including methods presumably used by practitioners. However, recent studies demonstrate that these methods result in inferior estimates compared to simpler substitutes. We empirically examine specification alternatives concluding that prediction goodness is only slightly sensitive to the default barrier, whereas the choice of assets expected return and volatility is significant. Equity historical returns and volatility result in under-biased estimates for assets expected returns and volatility, especially for defaulting firms. Acknowledging these characteristics we suggest specifications that improve the model accuracy.
The article can be downloaded from the Finance-Accounting seminar webpage:
http://recanati-bs.tau.ac.il/Eng/?CategoryID=639&ArticleID=1896