@article {Bystr{\"o}m39, author = {Hans N.E Bystr{\"o}m}, title = {Merton Unraveled}, volume = {8}, number = {4}, pages = {39--47}, year = {2006}, doi = {10.3905/jai.2006.627849}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Popular approaches to default probability estimation are often based on the approach initially described in Merton [1974]. By explicitly modeling a firm{\textquoteright}s market value, market value volatility and liability structure over time using contingent claims analysis the Merton model defines a firm as defaulted when the firm{\textquoteright}s value falls below its debt. This article demonstrates how a simplified {\textquotedblleft}spread sheet{\textquotedblright} version of the Merton model produces distance to default measures similar to the original Merton model. Moreover, when applied to a sample of US firms, the simplified model gives a relative ranking of firms that is essentially unchanged compared to the Merton model.TOPICS: Statistical methods, credit risk management}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/8/4/39}, eprint = {https://jai.pm-research.com/content/8/4/39.full.pdf}, journal = {The Journal of Alternative Investments} }