Estimation of Default Probabilities: Application of the Discriminant Analysis and the Structural Approach for Companies Listed on the BVC

Abstract

Estimation of Default Probabilities: Application of the Discriminant Analysis and the Structural Approach for Companies Listed on the BVC

Lahsen Oubdi

Ibn Zohr university, l.oubdi@uiz.ac.ma

Abdessamad Touimer

Ibn Zohr university, Abdessamad.touimer@edu.uiz.ac.ma

ABSTRACT

This article aims to compare the calculated results of the structural approach (Internal Ratings-Based IRB) and the discriminant analysis (Z-score of Altman 1968), based on data from companies listed on the BVC for the period from 02 January 2014 to December 31, 2014.

The structural approach is directly linked to the economic reality of the company; the default takes place as soon as the market value of these assets falls below a certain threshold. The major constraint for this approach is the determination of the probabilities of default.

This situation is overcomed by using the Black & Scholes model (1973), based on Monte Carlo simulations. While the Z-score method is a financial analysis technique of business failure predictions, which is based on financial and economic ratios.

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Keywords:

Credit risk, IRB approach, Z-score, Monte Carlo simulation, default probability