TY - JOUR T1 - Merton Unraveled JF - The Journal of Alternative Investments SP - 39 LP - 47 DO - 10.3905/jai.2006.627849 VL - 8 IS - 4 AU - Hans N.E Byström Y1 - 2006/03/31 UR - https://pm-research.com/content/8/4/39.abstract N2 - Popular approaches to default probability estimation are often based on the approach initially described in Merton [1974]. By explicitly modeling a firm'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's value falls below its debt. This article demonstrates how a simplified “spread sheet” 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 ER -