Edward Altman - Z score and Zeta model?
Im currently reading a book on credit risk and im wondering how do you exactly use the Z score or the Zeta model?
For example It says "standard error of estimate of EBIT/Total assets (normalized) for 10 years". Is this referring to the ebit/total assets in a 10 year period average?
Then it says "total capitalization", from this im guessing it referring DEBT+EQUITY+minority interest?
Thank you!
I'm not sure many people actually use the Z-score model (that I've seen anyway). It's just one of the most used models when it comes to textbooks. I wouldn't get too immersed in learning it in-depth.
Altman's Z core is for public manufacturing firms and must be adjusted for private and non-manufacturers. It is but one of many models of financial distress including Ohlson's O, Zavgren, and Merton's distance to default. There are more in the academic literature. Altman, Ohlson and Zavgren primarily use accounting data. Merton's measure comes from the Black Scholes option pricing model. Recent studies have found a combined market and accounting model works best.
As stated before, Z score is rarely used in practice. Not even worth bringing it up in a interview,
For example, Newfield Exploration, a high yield E&P that is projected to operate at a cash burn over the next two years, somehow has the same Altman score as AT&T and Verizon. Which you would suspect is at a greater risk of bankruptcy- an energy firm or a telecom?
Credit Risk - (Altman Z score ) - Help !!!! (Originally Posted: 10/17/2012)
Hi there
(Firstly I apologies if this topic is not suitable for this forum)
I am currently working on a credit fund. So basically they invest in unlisted debt instruments. As part of my job I have to analyse the risk of default of the issuers of these instruments.
I would like to know if the Altman Z score is suitable for predicting bankruptcy in banks.
if you know of other models that I can use for default prediction in banking institutions , which are relatively easy and straightforward to calculate as well as interpret , please give me some links...
P.S I have already considered KMV.
Much appreciated...
Check out Shumway (2001), Campbel et al (2010 or 2008) and Bharath and Shumway (2008)
thanks a lot ...
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