Alternative bankruptcy prediction models using option-pricing theory |
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| Authors: | Andreas Charitou Dionysia Dionysiou Neophytos Lambertides Lenos Trigeorgis |
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| Institution: | 1. Department of Accounting and Finance, University of Cyprus, P.O. Box 20537, Nicosia CY 1678, Cyprus;2. Division of Accounting and Finance, University of Stirling, Stirling FK9 4LA, UK;3. Department of Commerce, Finance and Shipping, Cyprus University of Technology, 140 Ayiou Andreou Street, 3603 Lemesos, Cyprus;4. Bank of Cyprus Chair Professor of Finance, Department of Public and Business Administration, University of Cyprus, P.O. Box 20537, Nicosia CY 1678, Cyprus |
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| Abstract: | We examine the empirical properties of the theoretical Black–Scholes–Merton (BSM) bankruptcy model. We evaluate the predictive ability of various existing modifications of the BSM model and extend prior studies by estimating volatility directly from market-observable returns on firm value. We show that parsimonious models using our direct market-observable volatility estimate perform better than alternative, more sophisticated, models. Our findings suggest the adoption of simpler modelling approaches relying on market data when implementing the BSM model. |
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| Keywords: | G33 G3 G0 M4 |
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