Egon Kalotay

A simple empirical model of equity-implied probabilities of default

In this article, the authors approximate the likelihood of default inferred from equity prices using accounting-based measures, firm characteristics, and industry-level expectations. Such empirical approximations enable the timely modeling of distress risk in the absence of equity prices or sufficient historical records of defaults. Through a series of re-sampling experiments, the authors show that their models deliver out-of-sample classification performance comparable to that of default likelihood inferred from equity prices using the Black–Scholes–Merton framework. Furthermore, they document the distinct roles of firm-level and macroeconomic information in capturing time-varying exposure to the risk of financial distress. More generally, the results underscore the importance of treating equity-implied default probabilities and fundamental variables as complementary rather than competing sources of predictive information.

Testing the Multivariate Normality of Australian Stock Returns

The multivariate normality of stock returns is a crucial assumption in many tests of assets pricing models. While past Australian research has examined the univariate normality of returns, univariate test statistics are unreliable for testing multivariate normality since they ignore the contemporaneous correlation between asset returns. This paper utilises a multivariate test procedure, based on the generalised method of moments, to test whether residuals from market model regressions are multivariate normal. The results suggest violations of the multivariate normality assumption which cast doubt over the validity over inferential procedures commonly used in the extant empirical literature.