PT - JOURNAL ARTICLE
AU - Byström, Hans N.E
TI - Merton Unraveled
AID - 10.3905/jai.2006.627849
DP - 2006 Mar 31
TA - The Journal of Alternative Investments
PG - 39--47
VI - 8
IP - 4
4099 - http://jai.pm-research.com/content/8/4/39.short
4100 - http://jai.pm-research.com/content/8/4/39.full
AB - 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