After one day of research i did not figured how to compute the input volatility for PRIVATE COMPANY in order to calculate the PD.

My goal is to compute the PD of each of my company in my portfolio, all companies are private companies. To do that i found 2 models that can fit my expectation:

The Merton's Model and KMV model.

Problem for both I cannot figured it out how to calculate the volatility.

For your information, I have accounting data at least for 3 years up to 10 years for some companies.

I could send you my excel sheet if you would like. It is very important for me as it is part of my master thesis.

Thank you in advance for your help.

  • $\begingroup$ Do you at least have prices and/or returns for the said private company? You need to tell us more on what you know about this private company. However, I am not hopeful on how useful the resulting volatility is, even if you can compute it. The private nature of the firm breaks practically every assumption behind the Black-Scholes model. $\endgroup$ – user32416 Sep 13 '15 at 21:12
  • $\begingroup$ I have all the accounting data for companies for a minimum of 3 years and some of them 10 years. I tried the KMV model as week but I have the same problem to compute the volatility of assets and equity. $\endgroup$ – manu Sep 13 '15 at 21:15

Accounting data won't work for what you are looking for. The only way to do it is to look to public firms on same industry, similar growth stage, same regulatory/legal challenges and compute the volatility of those and use it as a proxy for your firm. It is the best you will be able to get, and it will be a bad approximation. The Merton and KMV models already rely on some non-trivial assumptions.

  • $\begingroup$ So there is no way to compute the EDFwith accounting data? Because in a lot of research paper they sy it is possible but they don't provide the methodology. Even KMV says "Private firms’ EDFs can be calculated only by using somecomparability analysis based on accounting data." $\endgroup$ – manu Sep 14 '15 at 13:38
  • $\begingroup$ That is right. With the accounting data from your private firm you get a peer group of public firms. Again the construction of this peer group is very important but highly subjective. You should look for firms in the same industry, same growth (sales accounting), similar margins (EBITDA margins accounting), ideally similar leverage (net debt to EBITDA accounting), etc. $\endgroup$ – phdstudent Sep 14 '15 at 14:19
  • $\begingroup$ Thank you so much. I'll use Bloomberg to get a peer group. $\endgroup$ – manu Sep 14 '15 at 15:50

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