TY - JOUR T1 - A Simple Empirical Model of Equity-Implied<br/>Probabilities of Default JF - The Journal of Fixed Income SP - 71 LP - 85 DO - 10.3905/jfi.2011.20.3.071 VL - 20 IS - 3 AU - Edward Altman AU - Neil Fargher AU - Egon Kalotay Y1 - 2010/12/31 UR - https://pm-research.com/content/20/3/71.abstract N2 - 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–Scholes–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 ER -