Credit Risk Models II: Structural Models
by Abel Elizalde of CEMFI and Universidad Pública de Navarra
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).