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Merton's Default Risk Model for Private Company

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  • Battulga Gankhuu

Abstract

Because the asset value of a private company does not observable except in quarterly reports, the structural model has not been developed for a private company. For this reason, this paper attempt to develop the Merton's structural model for the private company by using the dividend discount model (DDM). In this paper, we obtain closed--form formulas of risk--neutral equity and liability values and default probability for the private company. Also, the paper provides ML estimators and the EM algorithm of our model's parameters.

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  • Battulga Gankhuu, 2022. "Merton's Default Risk Model for Private Company," Papers 2208.01974, arXiv.org.
    • Handle: RePEc:arx:papers:2208.01974
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    References listed on IDEAS

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    1. Guglielmo D'Amico & Riccardo De Blasis, 2020. "A review of the Dividend Discount Model: from deterministic to stochastic models," Papers 2001.00465, arXiv.org.
    2. 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.
    3. Alexander J. McNeil & Rüdiger Frey & Paul Embrechts, 2015. "Quantitative Risk Management: Concepts, Techniques and Tools Revised edition," Economics Books, Princeton University Press, edition 2, number 10496.
    4. 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.
    5. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
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