@article {Altman71, author = {Edward Altman and Neil Fargher and Egon Kalotay}, title = {A Simple Empirical Model of Equity-ImpliedProbabilities of Default}, volume = {20}, number = {3}, pages = {71--85}, year = {2010}, doi = {10.3905/jfi.2011.20.3.071}, publisher = {Institutional Investor Journals Umbrella}, abstract = {In this article, the authors approximate the likelihood of default inferred from equity prices using accounting-based measures, firm characteristics, and industry-level expectations. Such empirical approximations enable the timely modeling of distress risk in the absence of equity prices or sufficient historical records of defaults. Through a series of re-sampling experiments, the authors show that their models deliver out-of-sample classification performance comparable to that of default likelihood inferred from equity prices using the Black{\textendash}Scholes{\textendash}Merton framework. Furthermore, they document the distinct roles of firm-level and macroeconomic information in capturing time-varying exposure to the risk of financial distress. More generally, the results underscore the importance of treating equity-implied default probabilities and fundamental variables as complementary rather than competing sources of predictive information.TOPICS: Equity portfolio management, fundamental equity analysis, credit risk management}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/20/3/71}, eprint = {https://jfi.pm-research.com/content/20/3/71.full.pdf}, journal = {The Journal of Fixed Income} }