Alternative Bankruptcy Prediction Models using Option-Pricing Theory

Posted: 17 Mar 2011 Last revised: 28 Mar 2016

See all articles by Andreas Charitou

Andreas Charitou

University of Cyprus

Dionysia Dionysiou

University of Stirling

Neophytos Lambertides

Cyprus University of Technology

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King's College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: March 15, 2011

Abstract

We examine the empirical properties of the theoretical Black–Scholes–Merton (BSM) bankruptcy model. We evaluate the predictive ability of various existing modifications of the BSM model and extend prior studies by estimating volatility directly from market-observable returns on firm value.We show that parsimonious models using our direct market-observable volatility estimate perform better than alternative, more sophisticated, models. Our findings suggest the adoption of simpler modelling approaches relying on market data when implementing the BSM model.

Keywords: Bankruptcy prediction, Option-pricing theory, Volatility estimation

JEL Classification: G33, G3, G0, M4

Suggested Citation

Charitou, Andreas and Dionysiou, Dionysia and Lambertides, Neophytos and Trigeorgis, Lenos, Alternative Bankruptcy Prediction Models using Option-Pricing Theory (March 15, 2011). Journal of Banking and Finance, 37 (7), 2329-2341, 2011. Available at SSRN: https://ssrn.com/abstract=1786869 or http://dx.doi.org/10.2139/ssrn.1786869

Andreas Charitou

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893624 (Phone)
+357 2 895030 (Fax)

Dionysia Dionysiou (Contact Author)

University of Stirling ( email )

Accounting and Finance Division
Stirling, FK9 4LA
United Kingdom

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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