Estimation of Default Probabilities: Application of the Discriminant Analysis and the Structural Approach for Companies Listed on the BVC

This article aims to compare the calculated results of the structural approach (Internal Ratings-Based IRB) and the discriminant analysis (Z-score of Altman, 1968), based on data from companies listed on the BVC for the period from 02 January 2014 to December 31, 2014. The structural approach is directly linked to the economic reality of the company; the default takes place as soon as the market value of these assets falls below a certain threshold. The major constraint for this approach is the determination of the probabilities of default. This situation is overcome by using the Black & Scholes (1973) model, based on Monte Carlo simulations. While the Z-score method is a financial analysis technique of business failure predictions, which is based on financial and economic ratios.