ECB paper presents new corporate default prediction method

Authors say their “distance to insolvency” measure outperforms other forecasting methods

The European Central Bank, Frankfurt

A working paper published by the European Central Bank presents a new method for forecasting firms’ insolvency.

In Chronicle of a death foretold: does higher volatility anticipate corporate default? Miguel Ampudia, Filippo Busetto and Fabio Fornar present “distance to insolvency”, or DI.

The authors compare their model to two widely used measures: Moody’s expected default frequency (EDF) developed from Robert Merton’s model, and E I Altman’s Z-score. They examine which model has more power in

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