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Default Probabilities and the Credit Spread of Mexican Companies: The Modified Merton Model

Author

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  • Paula Morales-Bañuelos

    (Departamento de Estudios Empresariales, Universidad Iberoamericana CDMX, Mexico City 01219, Mexico)

  • Guillermo Fernández-Anaya

    (Departamento de Física y Matemáticas, Universidad Iberoamericana CDMX, Mexico City 01219, Mexico)

Abstract

This study aims to identify the model that best approximates the credit spread that should be fixed on debt instruments issued by both companies listed on the Mexican Stock Market, considering the particularities of the Mexican market. Five models were analyzed: Merton’s model, Brownian Motion Model, Power Law Brownian Motion Model, Bloomberg’s model, and the model presented in this paper, which includes the conformable derivatives, taking as a reference the change in the variable as other authors have done, and the Bloomberg corporate default risk model (DRSK) for publics firms. We concluded that the modified Merton model approximates, to a greater extent, the credit spreads that fix on a prime rate on the loans granted to Mexican non-financial companies.

Suggested Citation

  • Paula Morales-Bañuelos & Guillermo Fernández-Anaya, 2023. "Default Probabilities and the Credit Spread of Mexican Companies: The Modified Merton Model," Mathematics, MDPI, vol. 11(20), pages 1-30, October.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:20:p:4397-:d:1265446
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    References listed on IDEAS

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