Default risk assessment in Mexican corporations: empirical validation of the Merton-Löffler model

Abstract

This work evaluates the applicability of the Merton–Löffler structural credit risk model to Mexican publicly traded companies, examining its potential to complement traditional credit assessments in emerging markets. By conceptualizing corporate equity as a call option on firm assets and estimating unobservable parameters through Löffler’s iterative methodology, the study finds that the model captures relevant patterns of relative credit risk, albeit with only moderate alignment to rating agency classifications. While short-term predictive accuracy remains limited, the model exhibits some capacity to reflect longer-term credit dynamics consistent with theoretical expectations. Overall, the Merton–Löffler framework offers a rigorous and transparent approach for market-based credit risk evaluation in contexts characterized by informational constraints, though its implementation should be viewed as a complementary analytical tool rather than a substitute for comprehensive credit analysis.