Forecasting Default with the Merton Distance to Default Model

By Sreedhar T. Bharath, Tyler Shumway. 2008

1,971 citations recorded by the source corpus.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/bf8fb4cbcd93f8be7cc3ac5a42f0a1b47bb5a37b

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Citations in the corpus

Variable selection and corporate bankruptcy forecasts (2015, background): “CHS (2008) and Bharath and Shumway (2008), however, find that DD provides relatively little information about future bankruptcy beyond the variables used in their reduced-form models.”
CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage (2015, positive): “This further increases the expected default probability according to models proposed by Merton (1974) and Bharath and Shumway (2008). Therefore, we infer that overconfident banks that relax lending standards and assume more leverage should experience greater declines in bank performance and greater ”
Competition and the Cost of Debt (2012, neutral): “Default probability Estimate of firm’s default probability along the lines of Bharath and Shumway (2008).”
Real Asset Illiquidity and the Cost of Capital (2014, methodology): “D, including LogMCap, LogBM, DRP, BLev, ROE, VolRoe, FA/TA, R&DExp, LogAge, DivPay, SalGrow, LogInvPrice, RetPM, and RetP12M.”
Deep belief networks for predicting corporate defaults (2015, methodology): “Different from statistical models, the machine learning models are non-parametric techniques for the prediction, so they can overcome some constraints of the traditional statistical models [4], [5], [6].”
Do Measures of Financial Constraints Measure Financial Constraints (2016, positive): “We measure distance to default as in Bharath and Shumway (2008); see Appendix A for details.”
The End of Market Discipline? Investor Expectations of Implicit State Guarantees (2013, methodology): “9 distance to default measure has been shown to be good predictor of defaults, outperforming accounting-based models (Campbell, Hilscher and Szilagyi 2008; Hillegeist et al. 2004; Bharath and Shumway 2008).”
Economic uncertainty and bank risk: Evidence from emerging economies (2020, positive): “However, as Bharath and Shumway (2008) argue, Merton’s “distance to default” may underperform in out-of-sample forecasts, in comparison to a proposed “naïve distance to default”.”
Why Do Firms Form New Banking Relationships (2011, positive): “…Book to proxy for growth opportunities; Profits to proxy for profitability; Leverage and Default Likelihood to control for firm risk, where Default Likelihood is the modified version of the Merton-KMV expected default probability estimated using the procedure outlined in Bharath and Shumway (2008).”
Cash Holdings and Credit Risk (2012, positive): “Specifically, we use the simplified (“naïve”) distance to default measure suggested by Bharath and Shumway (2008), which they find to outperform other, more sophisticated proxies.”
Securitization Without Adverse Selection: The Case of Clos (2012, positive): “Implied probability of default Because only a subset of the companies in our sample have CDS trading, we also calculate implied default probabilities using the reduced form Merton (1974)-style model described in Bharath and Shumway (2008). Specifically, we look at the change in the borrower’s implie”
Debt Enforcement, Investment, and Risk Taking Across Countries (2013, methodology): “9 The third risk measure, Asset vol , is computed as in Bharath and Shumway (2008) as the average of the annual equity and debt volatilities, weighted by the market equity and debt face values. We also use a risk measure based on accounting information. Notably, following John, Litov, and Yeung (200”
Predicting Distress in European Banks (2014, background): “…and market price-based indicators contain useful predictive information not contained in the CAMELS indicators (see e.g. Flannery (1998), González-Hermosillo (1999), Jagtiani and Lemieux (2001), Curry et al. (2007), Bharath and Shumway (2008), Campbell et al. (2008) and Arena (2010)).”
The performance of insolvency prediction and credit risk models in the UK : a comparative study, development and wider application (2012, positive): “The prediction of financial distress and corporate insolvency and the assessment of credit risk have been the subject of much academic and professional research over the last half century (e.g. Beaver, 1966; Altman, 1968; Ohlson, 1980; Taffler, 1984; Coats and Fant, 1993; Charitou et al, 2004; Reisz”