Bulletin – September Quarter 2015 Default Risk Among Australian Listed Corporations Abstract

Market-based information can help detect deteriorating corporate health because it incorporates more forward-looking information than other data sources such as financial statements. With this in mind, the Reserve Bank has developed an indicator of financial health based on a contingent claims framework developed by Merton (1974), which is sometimes called a distance-to-default model. The Bank will primarily use the model to assess trends in financial health for the corporate sector as a whole and, in aggregate, the model is able to broadly match the dynamics of the corporate failures data, suggesting that it will be a useful addition to the Bank's existing suite of monitoring tools. The results from the model suggest that corporate financial conditions remain robust, despite some deterioration more recently, which partly reflects the headwinds faced by listed resource companies.

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