An Empirical Evaluation of Structural Credit Risk Models
Bank for International Settlements, Monetary and Economic Department, 2005 - Credit - 44 pages
"This paper evaluates empirically the performance of six structural credit risk models by comparing the probabilities of default (PDs) they deliver to ex post default rates. In contrast to previous studies pursuing similar objectives, the paper employs firm-level data and finds that theory-based PDs tend to match closely the actual level of credit risk and to account for its time path. At the same time, nonmodelled macro variables from the financial and real sides of the economy help to substantially improve the forecasts of default rates. The finding suggests that theory-based PDs fail to fully reflect the dependence of credit risk on the business and credit cycles. Most of the upbeat conclusions regarding the performance of the PDs are due to models with endogenous default. For their part, frameworks that assume exogenous default tend to underpredict credit risk. Three borrower characteristics influence materially the predictions of the models: the leverage ratio; the default recovery rate; and the risk-free rate of return"--T.p.
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4-quarter lag academic models asset payout ratio asset volatility assets process AST model AST refers B-rated ﬁrms bank BB-rated borrower characteristics calibration capital requirements coupon rate credit risk models default boundary default cost default recovery rate default risk default trigger endogenous default equity estimate ex post default exogenous ﬁnancial ﬁnding ﬁrm-speciﬁc PDs ﬁrst ﬁt GDP gap HH model HH refers horizon Huang and Huang Jensen inequality Leland and Toft leverage ratio ln addition ln contrast ln particular LT model LT refers macro variables mean absolute error MKMV PDs model-based PDs model-implied PDs Moody's one-year default rate one-year PDs p-values PDs implied post default rates predictions rating classes refers to Anderson refers to Huang refers to Leland reﬂect regulatory capital risk premium risk-free rate robust covariance matrices sample speciﬁcation stochastic process structural credit risk Sundaresan and Tychon Table term spread Tobit model value of assets