Does modeling framework matter? A comparative study of structural and reduced-form models
AbstractThis study provides a rigorous empirical comparison of structural and reduced-form credit risk frameworks. As major difference we focus on the discriminative modeling of default time. In contrast to previous literature, we calibrate both approaches to bond and equity prices. By using same input data, applying comparable estimation techniques, and assessing the out-of-sample prediction quality on same time series of CDS prices we are able to judge whether empirically the model structure itself makes an important difference. Interestingly, the models' prediction power is quite close on average. Still, the reduced-form approach outperforms the structural for investment-grade names and longer maturities. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2011,05.
Date of creation: 2011
Date of revision:
credit risk; structural models; reduced-form models; default intensity; stationary leverage; credit default swaps;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-30 (All new papers)
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