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March 2008 issue
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Tarashev
Demertzis, Viegi
Bolt, Humphrey, Uittenbogaard
Krainer, Lopez
Zhu
Riboni, Ruge-Murcia
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An Empirical Evaluation of Structural Credit-Risk Models

by Nikola A. Tarashev
Monetary and Economic Department, 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.

JEL Codes: G33, E44, G28, C13.

 
Full article (PDF, 53 pages 658 kb)