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Credit Risk Models II: Structural Models

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  • Abel Elizalde

Abstract

This report reviews the structural approach for credit risk modelling, both considering the case of a single firm and the case with default dependences between firms. In the single firm case, we review the Merton (1974) model and first passage models, examining their main characteristics and extensions. Liquidation process models extend first passage models to account for the possibility of a lengthy liquidation process which might or might not end up in default. Finally, we review structural models with state dependent cash flows (recession vs. expansion) or debt coupons (ratingbased). The estimation of structural models is addressed, covering the different ways proposed in the literature. In the second part of the text, we present some approaches to model default dependences between firms. They account for two types of default correlations: cyclical default correlation and contagion effects. We close the paper with a brief mention of factor models. The paper pretends to be a guide to the literature, providing a comprehensive list of references and, along the way, suggesting different possible extensions for its future development.

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  • Abel Elizalde, 2006. "Credit Risk Models II: Structural Models," Working Papers wp2006_0606, CEMFI.
  • Handle: RePEc:cmf:wpaper:wp2006_0606
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    1. Andreea Costea, 2017. "A Quantitative Approach to Credit Risk Management in the Underwriting Process for the Retail Portfolio," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(63), pages 157-186, March.
    2. Joachim Sicking & Thomas Guhr & Rudi Schafer, 2016. "Concurrent Credit Portfolio Losses," Papers 1604.06917, arXiv.org, revised Jan 2017.
    3. Joachim Sicking & Thomas Guhr & Rudi Schäfer, 2018. "Concurrent credit portfolio losses," PLOS ONE, Public Library of Science, vol. 13(2), pages 1-20, February.
    4. Trueck, Stefan & Rachev, Svetlozar T., 2008. "Rating Based Modeling of Credit Risk," Elsevier Monographs, Elsevier, edition 1, number 9780123736833, December.

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