Analyzing the Models of Financial Distress in Credit Risk

Abstract

This paper presents a study comparing the effectiveness of accounting-based and market-based models predicting financial distress. We examine various periods, including events from the 1970s to the 1990s, the impact of COVID-19, and the effect of APRA. Our findings demonstrate that an accounting-based distress model performs similarly to the market-based model of defaults. Furthermore, when we combine both sources of information, the resulting model outperforms either individual model. These results suggest that accounting and market-based information are mutually reinforcing when assessing distress levels in pricing.