Power and Level Validation of the Edftm Credit Measure in the U.s. Market
نویسندگان
چکیده
In this paper, we validate the performance of the MKMV EDF credit measure in its timeliness of default prediction, ability to discriminate good firms from bad firms, and accuracy of levels, with a focus on U.S. markets. We focus on the period 1996-2004 for most of our tests. Wherever possible, we compare the performance to that of other popular alternatives like agency ratings, Z-Scores, and a simpler version of Merton model. We find that the MKMV EDF credit measure has done consistently well across different time horizons, and different sub-samples based on firm size and credit quality. Our tests indicate that the MKMV EDF credit measure is a superior alternative to other popular credit risk measures.
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