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An Empirical Evaluation of Structural Credit Risk Models
Company: Bank for International Settlements
Company Url: Click here to open
Year Of Publication: 2005
Month Of Publication: July
Pages: 48
Download Count: 212
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 6-2-2007
Publisher: Administrator
Summary
This paper evaluates empirically the performance of six structural credit risk models by comparing theprobabilities of default (PDs) they deliver to ex post default rates. In contrast to previous studiespursuing similar objectives, the paper employs firm-level data and finds that theory-based PDs tend tomatch closely the actual level of credit risk and to account for its time path. At the same time, nonmodelledmacro variables from the financial and real sides of the economy help to substantiallyimprove the forecasts of default rates. The finding suggests that theory-based PDs fail to fully reflectthe dependence of credit risk on the business and credit cycles. Most of the upbeat conclusionsregarding the performance of the PDs are due to models with endogenous default. For their part,frameworks that assume exogenous default tend to under-predict credit risk. Three borrowercharacteristics influence materially the predictions of the models: the leverage ratio; the defaultrecovery rate; and the risk-free rate of return.
Author(s)
Tarashev, Nikola A. Sign in to follow this author
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