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Credit Risk Models Iii: Reconciliation Reduced - Structural Models

  • Abel Elizalde


    (CEMFI, Centro de Estudios Monetarios y Financieros)

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    In recent years, some papers hav tried to bridge the gap between the two main approaches in credit risk modelling: structural and reduced form models. Based on incomplete information versions of standard structural models, they are able to obtain reduced form models in which the intensity of default is not given exogenously but determined endogenously within the model and it is a function of the firm's characteristics and the level of informtion that investors posses. They key element to link both approaches lies in the model's information assumptions. Using a specification of a structural model where investors do not have complete information about the dynamics of the processes which trigger the firm's default, these models derive a cumulative rate of default consistent with a reduced form model. This paper pretends to be an introduction to this literature, providing some of basic insights of the modelling structure and the main conclusion and results.

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    Paper provided by CEMFI in its series Working Papers with number wp2006_0607.

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    Date of creation: Apr 2006
    Date of revision:
    Handle: RePEc:cmf:wpaper:wp2006_0607
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    1. Giesecke, Kay, 2004. "Correlated default with incomplete information," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1521-1545, July.
    2. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
    3. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
    4. Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167.
    5. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
    6. Umut Cetin & Robert Jarrow & Philip Protter & Yildiray Yildirim, 2004. "Modeling Credit Risk with Partial Information," Papers math/0407060,
    7. Reneby, Joel & Ericsson, Jan, 2001. "The Valuation of Corporate Liabilities: Theory and Tests," SSE/EFI Working Paper Series in Economics and Finance 445, Stockholm School of Economics, revised 19 Dec 2002.
    8. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
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