A 50‐Year Retrospective on Credit Risk Models, the Altman Z‐Score Family of Models, and Their Applications to Financial Markets and Managerial Strategies

The construction of a credit‐scoring model is relatively straightforward with an adequate and appropriate database of default and nondefault securities, or firms, and accurate predictive variables. Models for private firms can be built, indirectly, by using only those variables related to private firms, but based on publicly owned firm data, or by accessing databases which are populated by both publicly owned and private companies. This chapter discusses a number of important applications of credit risk models, such as Z‐scores for lending institutions. These include the accept‐reject decision, estimates of the probability of default and loss‐given‐default and costs of errors in default‐loss estimation. An intriguing application of the Z‐score model is to use it to assess the default risk of sovereign nations' debt. One of the most interesting and important applications of the Z‐score model is to apply the model as a guide to a successful turnaround of the firm.