Do you know a well used method how to calculate the PD of private companies using the Merton Model. The main challenges I am facing is to get the appropriate volatility of the assets and the drift.
Thank you in advance for your inputs.
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$\begingroup$ Do have a look at slides #8ff here bot.or.th/Thai/FinancialInstitutions/Highlights/IFRS9_Doc/… Effectively, you can either solve a bivariate equation system (numerically), or you introduce some iterative scheme - both are explained on the slides, or may give you a hint at where to start from there. $\endgroup$– KermittfrogDec 13, 2022 at 16:24
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$\begingroup$ I will have to compute the PD for companies which are not listed on the stock exchange. The companies are also relativally young, so that I do not have many data points for the history $\endgroup$– BsleonDec 14, 2022 at 12:26
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$\begingroup$ Then, maybe, you might need to resort to fundamentals-based credit risk estimators in order to calibrate a Merton-like default model, no? $\endgroup$– KermittfrogDec 14, 2022 at 13:11
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$\begingroup$ Your mean estimating the PD with fundamental-based credit risk estimators and then find the drift and volatility of the stochastic equation? $\endgroup$– BsleonDec 16, 2022 at 6:11
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