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A Determination of the Risk of Ruin: Comment

Published online by Cambridge University Press:  06 April 2009

Kenneth O. Cogger  and
Gary W. Emery
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Extract

The measures of risk proposed by Vinso are properly motivated with a concern for the dynamic nature of a firm's operations. The measures are subject to restrictions in application and interpretation, however. Some of these restrictions were caused by the choice of the Cornish-Fisher expansion to incorporate the adjustment for skewness and the resulting quadratic equation. The problems created by the existence of multiple real or imaginary roots to this equation are unresolved in the paper.

Apart from these problems, the measures do not represent probabilities of ruin; they often significantly understate the true probability. We have shown that the measures related to εrp are applicable only to firms with positive-drift processes and argue that they should be evaluated in a multivariate context.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 16 , Issue 5 , December 1981 , pp. 759 - 764
Copyright
Copyright © School of Business Administration, University of Washington 1981

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References

REFERENCES

[1]Emery, Gary W., and Cogger, Kenneth o.. “The Measurement of Liquidity.” Journal of Accounting Research (forthcoming).Google Scholar
[2]Johnson, Norman L., and Kotz, Samuel. Distributions in Statistics: Continuous Univariate Distributions: 1. Boston: Houghton Mifflin Company (1970).Google Scholar
[3]Vinso, Joseph D. “A Determination of the Risk of Ruin.” Journal of Financial and Quantitative Analysis, Vol. 14, No. 1 (03 1979), pp. 77–100.CrossRefGoogle Scholar
[4]Wilcox, Jarrod. “A Prediction of Business Failure Using Accounting Data.” Empirical Research in Accounting: Selected Studies, 1973. Supplement to Journal of Accounting Research, Vol. 2 (1973), pp. 163–179.CrossRefGoogle Scholar