Structural Models in Credit Risk Modeling
Published Online: 15 DEC 2012
Copyright © 2013 by Frank J. Fabozzi. All rights reserved.
Encyclopedia of Financial Models
How to Cite
Elizalde, A. 2012. Structural Models in Credit Risk Modeling. Encyclopedia of Financial Models.
- Published Online: 15 DEC 2012
Structural models and reduced-form models are the two primary types of credit risk models that seek to statistically describe default processes. Structural models use the evolution of firms' structural variables, such as asset and debt values, to model the time of default. In contrast, reduced-form models do not consider structural variables in an explicit manner when modeling default processes; instead, they model default as an exogenously driven process. Structural models include first passage models, liquidity process models, and state dependent models.
Keywords: Merton; model; structural models; default correlations; first passage models; liquidation process models; State dependent models; default event; liquidation