An Empirical Evaluation of Structural Credit Risk Models
by Nikola A Tarashev of the Bank for International Settlements
Abstract: This paper evaluates the capacity of five structural credit risk models to forecast default rates. In contrast to previous studies with similar objectives, the paper employs firm-level data and finds that model-based forecasts of default rates tend to be unbiased and to deliver point-in-time errors that are small in both statistical and economic terms. In addition, in and out-of-sample regression analysis reveals that the models account for a significant portion of the variability of credit risk over time but fail to fully reflect its dependence on macroeconomic cycles.
Keywords: probability of default, credit risk models, Basel II, macroeconomic factors of credit risk.
Published in: International Journal of Central Banking, Vol.4, No. 1, (March 2008), pp. 1-53.