Predicting corporate failures and market efficiency: Evidence from Italian stock market
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This work is a statistical test, on a sample of Italian firms, about the ability of market models to predict corporate failure. The paper compares different estimates of default probability on the basis of the different equity volatilities estimated, extrapolating some specific patterns. A comparative analysis is performed between the ability of these models and several accounting and hybrid models. The results highlight that the market approach is not always able to predict failure as the accounting models presented and adding this information in a hybrid models improves slightly the explanatory power. That suggests the ability of market models depends on the stock market efficiency, as pointed out in literature.
- hybrid model
- option pricing
- default probability
- credit risk