An Empirical Estimation of Default Risk of the UK Real Estate Companies |
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| Authors: | Kanak Patel Prodromos Vlamis |
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| Institution: | (1) Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge, CB3 9EP, UK;(2) Department of Land Economy and Harvard University, University of Cambridge, Real Estate Academic Initiative, 48 Quincy Street, Cambridge, MA 02138, USA |
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| 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. |
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| Keywords: | credit risk default probability real estate companies |
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