Structural Credit Models

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 the Model Accuracy in particular in connection with available data to model the corporate liability structure

See Also

• Copula Based Credit Portfolio Models
• Reduced Form Models