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Article: 3 Investigating the performance of alternative default-risk models: option-based versus accounting-based approaches.
- Article from:
- Australian Journal of Management
- Article date:
- December 1, 2006
- Author:
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Copyright informationCOPYRIGHT 2006 Australian Graduate School Of Management. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Abstract:
In this paper we evaluate the performance of three alternate default-risk models, seeking to find that measure which performs best, using a comprehensive sample drawn from the Australian equities market. The first two models are option-based models and are derived from Merton's (1974) insight that equity can be viewed as a call option on a firm's assets. In the first model, equity is modelled as a standard call option. In the second model, equity is modelled as a path-dependent barrier option. The third model is created using accounting ratios and is similar to Altman's (1968) Z-Score. To assess which of the models is superior, we consider variations of each ...
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