Default Prediction of Various Structural Models
by Ren-Raw Chen of Rutgers University,
July 21, 2006
Abstract: The structural approach of credit risk modeling has gained growing attention in both academics and industry. While there has been increasing effort in testing the structural models for credit derivatives pricing, little result has been shown on the default prediction of the structural models. In this paper, we compare comprehensively various credit structural models for their default prediction capability. We select models that cover distinctly different assumptions such that we can study how and why certain models can predict default better than others. In addition to the well known existing structural models, we also introduce a non-parametric model to study the distributional characteristics underlying the structural models.