Prediction of Default Risk Using Structural Models at Tehran Stock Exchange

Subject Areas : Financial engineering

Saeid Fallahpour ¹ , Masood Tadi ²

1 - استادیار دانشکده مدیریت دانشگاه تهران
2 - کارشناس ارشد مهندسی مالی، دانشگاه تهران

Received: 2016-03-04 Accepted : 2016-05-27 Published : 2016-09-22

Keywords: Credit Risk, Probability of Default, Structural models, Barrier Options,

Abstract :

Nowadays one of the most critical issues of risk management in banks, financial institutions and credit rating agencies is credit risk. Credit risk refers to the risk of default by the borrower, i.e. the borrower fails to fulfill its obligations to repay debt, or at least does not settle the obligations on time. In this study, we intend to predict the probability of default, in the selected companies at the Tehran stock exchange. It can be divided modes of assessing the default risk in three categories. These are structural models, data based experimental models and expert assessment models that determined by experts without statistical estimations. Our research is based on the structural models. Structural models such as first passage models are developed based on the Merton model. It can be said that the structural literature on credit risk starts with the paper by Merton (1974), who applies the option pricing theory developed by Black and Scholes (1973). Merton model has a number of simplifying assumptions, i.e. occurrence of default only could happen in maturity time. In this study by relaxing the above assumption, we will reach more developed model to calculate the probability of default. After that, we calculate the annual default probability of the selected companies both by the Merton model and the proposed model during the years 1390 and 1391 SH. Ultimately, the performance of both models is compared using Wilcoxon signed-rank test that indicates a significant difference between the two models.