?Predicting the Default Risk of Firm by Using the Maple Programming of the Iterated Merton Model

Abstract

This paper referred to a study that predict the default risk of firms using the iterated Merton model. Merton model is a widely used model in providing the assessment of firm probability to default.  The ability of the model in predicting default risk is proven by many empirical studies.  However, the iterated Merton model contains complicated mathematical structure to understand and thus, the paper enhanced the model into a maple program as a shortcut tool to predict default risk.  The implementation of the iterated Merton model into a Maple programming produce several Maple coding run by the Maple 18 software.  This program generates the iterated market value of asset, asset volatility and probability of default of firms as its main outputs.  In this paper, samples of data of two companies are utilized as inputs to the Maple program.  The result shows that the iterated market value of asset, asset volatility and probability of default converges at the second iteration.  The program is tested by making sure that the predicted probability of default is consistent with the ratings of the selected companies.  We found that the program able to predict the probability of default of the good rated performance company well rather than the poor rated performance company.  However, the inconsistency exists is due to the failure of getting all the relevant information to predict the probability of default.  Further research is recommended to improve the program into a sophisticated application.