Exact calibration of structural models via time-change

In this note, we propose a general structural approach to model a default time $\tau$ as the first-passage time (FPT) of a (``firm-value'') process $S$ below a (``debt'') barrier $K$ that comply with a pre-specified survival probability curve $G(t)=\Pr(\tau>t)$. Following an idea of Mbaye and Vrins (Mathematical Finance, 2022) applied to reduced-form models, our approach consists in two steps: choose a latent FPT model driven by a barrier $\tilde{K}$ and process $\tilde{S}$, and time-change those using a deterministic clock $\Theta$ to get $K_t=\tilde{K}_{\Theta(t)}$ and $S_t:=\tilde{S}_{\Theta(t)}$, leading to the final FTP model $(K,S,\Theta)$. As the market curve $G$ and the latent model $(\tilde{K},\tilde{S})$ are assumed to be given, the calibration step simply consists in finding the clock $\Theta$ such that the distribution of the FPT of $S$ below $K$ coincides with the survival curve $G$. We show that this is achievable for a broad class of specified curves $G$ and latent FTP models. The calibration amounts to a simple inversion of a function, which is almost immediate provided that the latent model is tractable enough. In particular, we show that the AT1P model of Brigo, Morini and Tarenghi - which is able to reproduce a broad range of CDS term-structures - can be regarded as the FPT of a time-changed drifted Brownian motion to a constant barrier: $\tilde{V}_t=\mu t+W_t$ and $\tilde{K}_t=k