Discriminatory Power and Predictions of Defaults of Structural Credit Risk Models
AbstractThis paper studies the discriminatory power and calibration quality of the structural credit risk models under the ¡§exogenous default boundary¡¨ approach including those proposed by Longstaff and Schwartz (1995) and Collin-Dufresne and Goldstein (2001), and ¡§endogenous default boundary¡¨ approach in Leland and Toft (1996) based on 2,050 non-financial companies in 46 economies during the period 1998 to 2005. Their discriminatory power in terms of differentiating defaulting and non-defaulting companies is adequate and the differences among them are not material. In addition, the calibration quality of the three models is similar, although limited evidence is found that the Longstaff and Schwartz model marginally outperforms the others in some subsamples. Overall, no significant difference in the capability of measuring credit risk between the ¡§exogenous default boundary¡¨ and ¡§endogenous default boundary¡¨ approaches is found.
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Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 342009.
Length: 29 pages
Date of creation: Nov 2009
Date of revision:
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Default Probabilities; Credit Risk Models;
Find related papers by JEL classification:
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-02 (All new papers)
- NEP-BAN-2010-05-02 (Banking)
- NEP-RMG-2010-05-02 (Risk Management)
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