Journal article
On the calibration of structural credit spread models
Annals of finance, Vol.5(2), pp.189-208
03/2009
Handle:
https://hdl.handle.net/2376/109420
Abstract
Empirical findings are mixed about the performance of structural models for term structure of credit spreads. It is commonly believed that all structural models have equally poor performance after calibration. However, proper calibration is not a trivial issue, especially for highly structural models. This paper proposes a more accurate procedure for calibrating two models: Leland–Toft (J Finance 51:987–1019, 1996) and Collin-Dufresne and Goldstein (J Finance 56:2177–2208, 2001). Using rating-based bond data, we find that the Leland–Toft model has significantly greater explanatory power for credit spreads across rating categories than previously reported. We provide theoretical explanations for these findings, and further extend our empirical analysis to include 286 individual senior bonds. Our findings help clarify the controversies over the performance of structural models in general and that of the Leland–Toft model in particular. In addition, we offer a rigorous procedure that can be used for calibrating other structural models more effectively.
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Details
- Title
- On the calibration of structural credit spread models
- Creators
- Howard Qi - School of Business and Economics Michigan Technological University Houghton MI 49931 USASheen Liu - Washington State University-Vancouver Vancouver WA USAChunchi Wu - University of Missouri-Columbia Columbia MO USA
- Publication Details
- Annals of finance, Vol.5(2), pp.189-208
- Academic Unit
- Finance and Management Science, Department of
- Publisher
- Springer-Verlag; Berlin/Heidelberg
- Identifiers
- 99900546904801842
- Language
- English
- Resource Type
- Journal article