The Merton's Default Risk Model for Public Company

TL;DR

This paper extends Merton's default risk model to public companies with observable liabilities, deriving formulas for equity, liability values, default probabilities, and proposing ML estimators for model parameters.

Contribution

It introduces a structural model for public companies with observable liabilities and provides ML estimators for its parameters, enhancing risk assessment methods.

Findings

Formulas for risk-neutral equity and liability values derived.

Default probabilities explicitly formulated.

ML estimators for model parameters proposed.

Abstract

In this paper, we developed the Merton's structural model for public companies under an assumption that liabilities of the companies are observed. Using Campbell and Shiller's approximation method, we obtain formulas of risk-neutral equity and liability values and default probabilities for the public companies. Also, the paper provides ML estimators of suggested model's parameters.