Computing Reliable Default Probabilities in Turbulent Times

Rethinking Valuation and Pricing Models, pp. 241-255, Academic Press - Elsevier, 2013, Forthcoming

Posted: 2 Dec 2012

See all articles by Dean Fantazzini

Dean Fantazzini

Moscow School of Economics, Moscow State University; National Research University Higher School of Economics

Mario Maggi

University of Pavia - Department of Economics and Management; University of Pavia - Department of Economics and Management

Date Written: 2012

Abstract

In this paper, we compare different methods for computing default probabilities using a sample of banks that experienced financial distress during the 2007–2009 global financial crisis. The traditional KMV-Merton model for firm valuation, credit ratings by rating agencies and a recently proposed zero price probability model are discussed and compared. An empirical application with the acquired or bankrupt banks during the financial crisis is presented to show the differences among the three approaches and to discuss their suitability during financial distresses.

Keywords: credit ratings, credit default, default probabilities, probability of default, financial crises, firm value, KMV, Lehman, Merton, no arbitrage, option pricing, structural models, Zero price probability, ZPP

JEL Classification: G12, G30, G32, G33

Suggested Citation

Fantazzini, Dean and Maggi, Mario, Computing Reliable Default Probabilities in Turbulent Times (2012). Rethinking Valuation and Pricing Models, pp. 241-255, Academic Press - Elsevier, 2013, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2183679

Dean Fantazzini (Contact Author)

Moscow School of Economics, Moscow State University ( email )

GSP-2, Leninskie Gory
Moscow, 119992
Russia
+7 495 5105256 (Phone)
+7 495 5105267 (Fax)

HOME PAGE: https://sites.google.com/site/deanfantazzini/

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

HOME PAGE: http://www.hse.ru/org/persons/11532644

Mario Maggi

University of Pavia - Department of Economics and Management ( email )

Via San Felice, 5
Pavia, PV 27100
Italy

HOME PAGE: http://economia.unipv.it/pagp/pagine_personali/maggma/moreinfo.htm

University of Pavia - Department of Economics and Management ( email )

Strada Nuova, 65
Pavia, 27100
Italy

HOME PAGE: http://economia.unipv.it/pagp/pagine_personali/maggma/moreinfo.htm

Register to save articles to
your library

Register

Paper statistics

Abstract Views
365
PlumX Metrics