IDEAS home Printed from https://ideas.repec.org/a/kap/jrefec/v32y2006i1p21-40.html
   My bibliography  Save this article

An Empirical Estimation of Default Risk of the UK Real Estate Companies

Author

Listed:
  • Kanak Patel
  • Prodromos Vlamis

Abstract

Based on the Black and Scholes (Black, F., and M. Scholes. (1973). The Pricing of Options and Corporate Liabilities, Journal of Political Economy 81, 637–659) and Merton (Merton, R. C. (1974). On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance 29, 449–470) (BSM) contingent claims model, and KMV Corporation framework, we estimate the distance to default and the “risk neutral” default probabilities for a sample of 112 real estate companies over the period 1980 to 2001. Our empirical results classifies failed and non-failed companies into Type I error, cases that the BSM-type model fails to predict default when it did occur, and Type II error where BSM-type model predicts default when it did not occur. We find that none of the companies belong to the category of Type I error. Type II error is observed in 12 out of 112 companies. These results support the theoretical underpinnings of the BSM-type structural model in that the two driving forces of default are high leverage and high asset volatility. Copyright Springer Science + Business Media, Inc. 2006

Suggested Citation

  • Kanak Patel & Prodromos Vlamis, 2006. "An Empirical Estimation of Default Risk of the UK Real Estate Companies," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 21-40, February.
    • Handle: RePEc:kap:jrefec:v:32:y:2006:i:1:p:21-40
    DOI: 10.1007/s11146-005-5176-x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11146-005-5176-x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11146-005-5176-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    2. Chunsheng Zhou, 1997. "A jump-diffusion approach to modeling credit risk and valuing defaultable securities," Finance and Economics Discussion Series 1997-15, Board of Governors of the Federal Reserve System (U.S.).
    3. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    4. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    7. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    8. Saa-Requejo, Jesus & Santa-Clara, Pedro, 1997. "Bond Pricing with Default Risk," University of California at Los Angeles, Anderson Graduate School of Management qt3w71g2ch, Anderson Graduate School of Management, UCLA.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Anderson, Ronald & Sundaresan, Suresh, 2000. "A comparative study of structural models of corporate bond yields: An exploratory investigation," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 255-269, January.
    11. Brockman, Paul & Turtle, H. J., 2003. "A barrier option framework for corporate security valuation," Journal of Financial Economics, Elsevier, vol. 67(3), pages 511-529, March.
    12. repec:bla:jfinan:v:44:y:1989:i:5:p:1351-60 is not listed on IDEAS
    13. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    14. Fons, Jerome S, 1987. "The Default Premium and Corporate Bond Experience," Journal of Finance, American Finance Association, vol. 42(1), pages 81-97, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yukiko Konno & Yuki Itoh, 2017. "A creative city planning framework by a private company: Case study of the development of Futako-Tamagawa by Tokyu," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1270712-127, January.
    2. Duc Hong Vo & Binh Ninh Vo Pham & Chi Minh Ho & Michael McAleer, 2019. "Corporate Financial Distress of Industry Level Listings in Vietnam," JRFM, MDPI, vol. 12(4), pages 1-17, September.
    3. Dinh, Dung V. & Powell, Robert J. & Vo, Duc H., 2021. "Forecasting corporate financial distress in the Southeast Asian countries: A market-based approach," Journal of Asian Economics, Elsevier, vol. 74(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    2. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011, January-A.
    3. repec:wyi:journl:002109 is not listed on IDEAS
    4. Mr. Marcel Peter & Martín Grandes, 2005. "How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa," IMF Working Papers 2005/217, International Monetary Fund.
    5. Stephen Zamore & Kwame Ohene Djan & Ilan Alon & Bersant Hobdari, 2018. "Credit Risk Research: Review and Agenda," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(4), pages 811-835, March.
    6. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    7. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    8. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    9. Chiarella, Carl & Fanelli, Viviana & Musti, Silvana, 2011. "Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model," European Journal of Operational Research, Elsevier, vol. 208(2), pages 95-108, January.
    10. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    11. International Association of Deposit Insurers, 2011. "Evaluation of Deposit Insurance Fund Sufficiency on the Basis of Risk Analysis," IADI Research Papers 11-11, International Association of Deposit Insurers.
    12. Jose Giancarlo Gasha & Mr. Andre O Santos & Mr. Jorge A Chan-Lau & Mr. Carlos I. Medeiros & Mr. Marcos R Souto & Christian Capuano, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 2009/162, International Monetary Fund.
    13. Martin Dòzsa & Karel Janda, 2015. "Corporate asset pricing models and debt contracts," CAMA Working Papers 2015-33, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    14. Gatzert, Nadine & Martin, Michael, 2012. "Quantifying credit and market risk under Solvency II: Standard approach versus internal model," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 649-666.
    15. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5, July-Dece.
    16. Greta Falavigna, 2006. "Models for Default Risk Analysis: Focus on Artificial Neural Networks, Model Comparisons, Hybrid Frameworks," CERIS Working Paper 200610, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    17. Hamerle, Alfred & Liebig, Thilo & Rösch, Daniel, 2003. "Credit Risk Factor Modeling and the Basel II IRB Approach," Discussion Paper Series 2: Banking and Financial Studies 2003,02, Deutsche Bundesbank.
    18. Reneby, Joel & Ericsson, Jan, 2001. "The Valuation of Corporate Liabilities: Theory and Tests," SSE/EFI Working Paper Series in Economics and Finance 445, Stockholm School of Economics, revised 07 Jan 2003.
    19. Ramaprasad Bhar, 2010. "Stochastic Filtering with Applications in Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, August.
    20. Augusto Castillo, 2004. "Firm and Corporate Bond Valuation: A Simulation Dynamic Programming Approach," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(124), pages 345-360.
    21. Trueck, Stefan & Rachev, Svetlozar T., 2008. "Rating Based Modeling of Credit Risk," Elsevier Monographs, Elsevier, edition 1, number 9780123736833.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jrefec:v:32:y:2006:i:1:p:21-40. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.