New Perspective

The performance of debt and equity markets in Anglo American Plc and BHP Billiton Plc in the period 2006 to 2015 through the lens of Merton’s structural model

Leon B. Sanderson
South African Journal of Economic and Management Sciences | Vol 22, No 1 | a1854 | DOI: https://doi.org/10.4102/sajems.v22i1.1854 | © 2019 Leon B. Sanderson | This work is licensed under CC Attribution 4.0
Submitted: 31 March 2017 | Published: 14 February 2019


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Abstract

This article applies the Merton structural model in evaluating the performance of the debt and equity markets in Anglo American Plc and BHP Billiton Plc in the period 2006 to 2015. We consider statistical and economic measures of the efficacy of the Merton model in explaining observed market behaviour. We find strong but unstable statistical support for the Merton model as a descriptor of market behaviour. We generated superior risk adjusted returns when applying the results of our analysis to an investment strategy. Market prices deviate from model behaviour; however, the relationship appears to be mean reverting which supports the investment thesis.


Keywords

asset pricing; options; contingent pricing; capital structure; bankruptcy

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