| The Journal of Real Estate Finance and Economics | |
| Volume 32, Issue 1, Article 2 (Abstract) | |
| Title: | An Empirical Estimation of Default Risk of the UK Real Estate Companies |
| Author: | Kanak Patel and Prodromos Vlamis |
| Abstract: | Based on the Black and Scholes (1973) and Merton (1974) (BSM) contingent claims model, and KMV Corporation framework, we estimate the distance to default and the "risk neutral" default probabilities for a sample of 112 real estate companies over the period 1980 to 2001. Our empirical results classifies failed and non-failed companies into Type I error, cases that the BSM-type model fails to predict default when it did occur, and Type II error where BSM-type model predicts default when it did not occur. We find that none of the companies belong to the category of Type I error. Type II error is observed in 12 out of 112 companies. These results support the theoretical underpinnings of the BSM-type structural model in that the two driving forces of default are high leverage and high asset volatility. |
| Keywords: | credit risk, default probability, real estate companies |