%0 Journal Article
%A Byström, Hans N.E
%T Merton Unraveled
%B A Flexible Way of Modeling Default Risk
%D 2006
%R 10.3905/jai.2006.627849
%J The Journal of Alternative Investments
%P 39-47
%V 8
%N 4
%X Popular approaches to default probability estimation are often based on the approach initially described in Merton [1974]. By explicitly modeling a firm's market value, market value volatility and liability structure over time using contingent claims analysis the Merton model defines a firm as defaulted when the firm's value falls below its debt. This article demonstrates how a simplified “spread sheet” version of the Merton model produces distance to default measures similar to the original Merton model. Moreover, when applied to a sample of US firms, the simplified model gives a relative ranking of firms that is essentially unchanged compared to the Merton model.TOPICS: Statistical methods, credit risk management
%U https://jai.pm-research.com/content/iijaltinv/8/4/39.full.pdf