Default risk of listed companies in the context of the threat to commodity markets in the times of COVID-19 pandemic

Abstract

PURPOSE: The purpose of this study was to identify the threat of default risk among commodity-related companies in European equity markets.

DESIGN/METHODOLOGY/APPROACH: Determination of the default risk of companies listed on several stock exchanges followed the Merton model by comparing the probability of bankruptcy in the time intervals from 1 January 2019 to 30 June 2019, and from 1 January 2020 to 30 June 2020. The calculations were based on data from the Wall Street Journal database. The companies selected for the study represent the main indexes of five European stock exchanges. In total, the analysis covers 40 commodity-related companies and 20 companies from the control groups.

FINDINGS: It was observed that commodity-related companies stood out against the control group in terms of default risk in the times of Covid-19 pandemic. The growing risk of default among stock market companies from significant European stock exchanges is a threat which - if unrecognized - may lead to a new financial crisis that can undermine the foundations of European economy.

PRACTICAL IMPLICATIONS: The research results can be used by financial institutions in the process of creating a more customized approach to the modeling of credit risk of commodity-related companies. This will enable rationalization of risk management costs.

ORIGINALITY/VALUE: This study lies in the research area orientated towards exploration of relations between types of risks, which is an original aspect of this paper. More broadly, the research seeks to build risk assessment models that will be more adaptable to actual market situations in the times of Covid-19 pandemic.