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A Determination of the Risk of Ruin: Comment

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  • Cogger, Kenneth O.
  • Emery, Gary W.

Abstract

The measures of risk proposed by Vinso are properly motivated with a concern for the dynamic nature of a firm's operations. The measures are subject to restrictions in application and interpretation, however. Some of these restrictions were caused by the choice of the Cornish-Fisher expansion to incorporate the adjustment for skewness and the resulting quadratic equation. The problems created by the existence of multiple real or imaginary roots to this equation are unresolved in the paper.Apart from these problems, the measures do not represent probabilities of ruin; they often significantly understate the true probability. We have shown that the measures related to εrp are applicable only to firms with positive-drift processes and argue that they should be evaluated in a multivariate context.

Suggested Citation

  • Cogger, Kenneth O. & Emery, Gary W., 1981. "A Determination of the Risk of Ruin: Comment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(5), pages 759-764, December.
    • Handle: RePEc:cup:jfinqa:v:16:y:1981:i:05:p:759-764_01
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    Cited by:

    1. Kurt M. Fanning & Kenneth O. Cogger, 1994. "A Comparative Analysis of Artificial Neural Networks Using Financial Distress Prediction," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 3(4), pages 241-252, December.

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