Estimating Default Probabilities Implicit in Equity Prices
Tibor Janosi, Robert Jarrow, and Yildiray Yildirim This paper uses a reduced form credit risk model to estimate default probabilities implicit in equity prices. For a cross-section of firms, a time-series regression of monthly equity returns is estimated. We show that it is feasible to infer the firm’s probability of default implicit in equity returns.
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