Citation Charitou A, Dionysiou D, Lambertides N & Trigeorgis L (2013) Alternative bankruptcy prediction models using option-pricing theory, Journal of Banking and Finance, 37 (7), pp. 2329-2341.
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.