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University of Stirling


Article in Journal

Alternative bankruptcy prediction models using option-pricing theory

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.

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.

Bankruptcy prediction; Option-pricing theory; Volatility estimation

AuthorsCharitou Andreas, Dionysiou Dionysia, Lambertides Neophytos, Trigeorgis Lenos
Publication date07/2013
ISSN 0378-4266

Journal of Banking and Finance: Volume 37, Issue 7 (2013)

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