Structural Credit Models

From Open Risk Manual

Definition

Structural Credit Models denote a family of corporate credit risk models that treat corporate debt and default behaviour in a contingent claim (option theoretic) framework.

There is a wide range of variations, including first passage (threshold) models, models with incomplete information etc. In a credit pricing context structural models are alternatives to stochastic intensity (also reduced form) models. In a credit risk measurement context structural models are alternatives to logistic regression models (or generalizations to proportional hazard rate models).

Issues and Challenges

  • While structural models offer a compelling narrative in understanding drivers of credit risk, ultimately the question is what Model Accuracy they offer.

References

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