Research Article
An Application on Merton Model in the Non-efficient Market
@INPROCEEDINGS{10.1007/978-3-642-02469-6_8, author={Yanan Feng and Qingxian Xiao}, title={An Application on Merton Model in the Non-efficient Market}, proceedings={Complex Sciences. First International Conference, Complex 2009, Shanghai, China, February 23-25, 2009, Revised Papers, Part 2}, proceedings_a={COMPLEX PART 2}, year={2012}, month={5}, keywords={Merton Model market efficiency probability of default}, doi={10.1007/978-3-642-02469-6_8} }- Yanan Feng
Qingxian Xiao
Year: 2012
An Application on Merton Model in the Non-efficient Market
COMPLEX PART 2
Springer
DOI: 10.1007/978-3-642-02469-6_8
Abstract
Merton Model is one of the famous credit risk models. This model presumes that the only source of uncertainty in equity prices is the firm’s net asset value .But the above market condition holds only when the market is efficient which is often been ignored in modern research. Another, the original Merton Model is based on assumptions that in the event of default absolute priority holds, renegotiation is not permitted , liquidation of the firm is costless and in the Merton Model and most of its modified version the default boundary is assumed to be constant which don’t correspond with the reality. So these can influence the level of predictive power of the model. In this paper, we have made some extensions on some of these assumptions underlying the original model. The model is virtually a modification of Merton’s model. In a non-efficient market, we use the stock data to analysis this model. The result shows that the modified model can evaluate the credit risk well in the non-efficient market.