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Robustness of Distance-to-Default

Publikation: Forskning - peer reviewKonferencebidrag i proceedings

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DOI

Distance-to-default is a remarkably robust measure for ranking firms according to their risk of default. The ranking seems to work despite the fact that the Merton model from which the measure is derived produces default probabilities that are far too small when applied to real data. We use simulations to investigate the robustness of the distance-to-default measure to different model specifications. Overall we find distance-to-default to be robust to a number of deviations from the simple Merton model that involve different asset value dynamics and different default triggering mechanisms. A notable exception is a model with stochastic volatility of assets. In this case both the ranking of firms and the estimated default probabilities using distance-to-default perform significantly worse. We therefore propose a volatility adjustment of the distance-to-default measure, that significantly improves the ranking of firms with stochastic volatility.

Publikationsoplysninger

OriginalsprogEngelsk
Titel26th Australasian Finance & Banking Conference 2013
RedaktørerFariborz Moshirian
Antal sider25
Udgivelses stedSydney
UdgiverUNSW Australia Business School
Publikationsdato2013
ISBN (trykt)9780987312754
DOI
StatusUdgivet - 2013
BegivenhedThe 26th Australasian Finance and Banking Conference 2013 - Sydney, Australien

Konference

KonferenceThe 26th Australasian Finance and Banking Conference 2013
Nummer26
LokationShangri-la Hotel
LandAustralien
BySydney
Periode17/12/201319/12/2013
Internetadresse

    Emneord

  • Default risk, Default prediction, Distance-to-default, Stochastic volatility

ID: 42651896