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Expected Default Probabilities in Structural Models: Empirical Evidence

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  • Kanak Patel
  • Ricardo Pereira

Abstract

We apply a set of structural models (Black and Cox 1976; Collin-Dufresne and Goldstein 2001; Ericsson and Reneby 1998; Leland and Toft 1996; Longstaff and Schwartz 1995; Merton 1974) to estimate expected default probabilities (EDPs) for a sample of failed and non-failed UK real estate companies. Results are generally consistent with models’ predictions and estimates of EDPs for different models are closely clustered. The results of z-scores and synthetic ratings misclassify 33% of the total sample in contrast to 8% misclassification by structural models. Further analysis of EDPs based on logistic regressions suggests the observed misclassification of the companies by structural models is due to special company management and/or regulatory circumstances rather than limitations of these models. Copyright Springer Science+Business Media, LLC 2007

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  • Kanak Patel & Ricardo Pereira, 2007. "Expected Default Probabilities in Structural Models: Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 107-133, January.
    • Handle: RePEc:kap:jrefec:v:34:y:2007:i:1:p:107-133
    DOI: 10.1007/s11146-007-9006-1
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    Cited by:

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    2. Yu-Ling Lin & Ta-Cheng Chang & Su-Jing Yeh, 2012. "Default Risk and Equity Returns: Evidence from the Taiwan Equities Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(2), pages 181-204, May.
    3. Jarrow, Robert A., 2011. "Credit market equilibrium theory and evidence: Revisiting the structural versus reduced form credit risk model debate," Finance Research Letters, Elsevier, vol. 8(1), pages 2-7, March.

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    More about this item

    Keywords

    Expected default probabilities; Structural models; C30; G13; G33;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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