Predictive Merton


Default risk is the uncertainty surrounding a firm’s ability to pay its creditors. Prior to default, we have no way of distinguishing for certain the firms that will default from those that will not. The best we can do is estimate the probability that a firm will default.

One way to tackle this problem is through the option pricing approach to default risk, sometimes known as the Merton approach (Merton, 1974). This approach builds on the idea that an equity holder has an implicit option on the

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here