Coruscation

Credit Risk Models II: Structural Models
July 2005

The structural approach for modelling credit risk considers both
the case of a single firm and the case with default dependences
between firms.

In the single firm case, we review the Merton (1974) model and
first passage models, based on Black & Cox (1976), examining
their main characteristics and extensions. The issue of estimating
structural models is also addressed, covering the different ways
proposed in the literature.

The issue of estimating structural models is also addressed,
covering the different ways proposed in the literature.

Secondly, we model default dependences among firms, which account
for two types of default correlations: cyclical default correlation
and contagion effects. We close with a brief mention of factor models.

The paper guides readers throught the literature, providing a
comprehensive list of references and, along the way, suggesting
different possible extensions for its future development.

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