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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. $\endgroup$ Dec 13, 2022 at 16:24
  • $\begingroup$ 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 $\endgroup$
    – Bsleon
    Dec 14, 2022 at 12:26
  • $\begingroup$ Then, maybe, you might need to resort to fundamentals-based credit risk estimators in order to calibrate a Merton-like default model, no? $\endgroup$ Dec 14, 2022 at 13:11
  • $\begingroup$ Your mean estimating the PD with fundamental-based credit risk estimators and then find the drift and volatility of the stochastic equation? $\endgroup$
    – Bsleon
    Dec 16, 2022 at 6:11

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