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Volume 3/Number 4, Winter 2009/10 Research Papers Discriminatory power and predictions of defaults of structural credit risk models Tak-Chuen Wong
Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8, Finance Street, Central, Hong Kong, China; email: etcwong@hkma.gov.hk Cho-hoi Hui
Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8, Finance Street, Central, Hong Kong, China; email: chhui@hkma.gov.hk Chi-fai Lo
Institute of Theoretical Physics and Department of Physics, Room 207, 2nd Floor, Science Centre North Block, The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research, Hong Kong, China; email: cflo@phy.cuhk.edu.hk This paper studies the discriminatory power and calibration quality of the structural credit risk models under the "exogenous default boundary" approach including those proposed by Longstaff and Schwartz (1995) and Collin-Dufresne and Goldstein (2001), and the "endogenous default boundary" approach in Leland and Toft (1996) based on 2,050 non-financial companies in 46 economies during the period 1998-2005. Their discriminatory power in terms of differentiating defaulting and non-defaulting companies is adequate and the differences among them are not material. In addition, the calibration quality of the three models is similar, although limited evidence is found that the Longstaff and Schwartz model marginally outperforms the others in some subsamples. Overall, no significant difference in the capability of measuring credit risk between the "exogenous default boundary" and "endogenous default boundary" approaches is found.
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