Financial distress prediction with knock out real options: a study for the argentine market

  • Gastón Silverio Milanesi Departamento Ciencias de la Administración, Universidad Nacional del Sur, Argentina


This paper explores default prediction models basis on real options theory, proposing a simple model using exotic barriers options. The financial distress prediction models consider the value of net capital like a call option over the firm’s assets. Its main weakness resides in the direct relationship between asset’s volatility and option value.
The knock out barrier option type, for certain critical level of assets, adjusts inversely the relationship between volatility and net capital value. In this line, a naive version of barrier models for predict financial distress and calculates default values for firms, sector and market is proposes. First, a case method is employed to make a comparative analysis between the traditional naive model and the naive barrier options. Over variables like volatility, leverage, time horizon, the sensitivity analysis is applied, and over a representative sample of Argentinian market’ firms is implemented. The obtained results indicated the better development of the barriers option model. With increased volatility, net capital value tend to reduce, and showed direct correlation between volatility and default probabilities. The model is a useful tool to predict firms’ probabilities and value of default, in an individual o aggregated level.
Keywords Real options, Barriers, Default, Default expected value
How to Cite
Milanesi, G. (2020). Financial distress prediction with knock out real options: a study for the argentine market. Estudios de Administración, 26(2), 52-81. doi:10.5354/0719-0816.2020.56951