@article{23629843800b4d598fd30f053ca76edd,
title = "Specification analysis of structural credit risk models",
abstract = "Empirical studies of structural credit risk models so far are often based on calibration, rolling estimation, or regressions. This paper proposes a GMM-based method that allows us to estimate model parameters and test model-implied restrictions in a unified framework. We conduct a specification analysis of five representative structural models based on the proposed GMM procedure, using information from both equity volatility and the term structure of single-name credit default swap (CDS) spreads. Our test results strongly reject the Merton (1974) model and two diffusion-based models with a flat default boundary. The other two models, one with jumps and one with stationary leverage ratios, do improve the overall fit of CDS spreads and equity volatility. However, all five models have difficulty capturing the dynamic behavior of both equity volatility and CDS spreads, especially for investment-grade names. On the other hand, these models have a much better ability to explain the sensitivity of CDS spreads to equity returns.",
author = "Huang, {Jing Zhi} and Zhan Shi and Hao Zhou",
note = "Funding Information: * The authors would like to thank Amit Goyal (the editor), an anonymous referee, Jean Helwege, Anh Le, George Tauchen, Marliese Uhrig-Homburg; seminar participants at Arizona, Central University of Finance and Economics, Cheung Kong Graduate School of Business, China Europe International Business School, Lehigh, MIT, Shanghai University of Finance and Economics; and conference par-ticipants (and especially discussants) at the 2006 Econometric Society North American Winter Meeting in Boston (Viral Acharya), the 2006 Derivatives and Risk Management Conference at FDIC, the 2007 Federal Reserve Board Conference on Credit Risk and Credit Derivatives, Moody{\textquoteright}s 4th Annual Credit Risk Conference in Copenhagen (Rangarajan Sundaram), the 2007 Gutmann Center Symposium on Credit Risk and the Management of Fixed-Income Portfolios in Vienna (Thomas Dangl), the 2007 China International Conference in Finance (Yi Zhou), the 2008 Mitsui Symposium at Michigan (Ren-Raw Chen), the 2008 Singapore International Conference on Finance (Jan Ericsson), the 2008 Northern Finance Association Meeting in Manitoba (Pascal Francois), and the 2009 American Finance Association Meeting in San Francisco (Ilya Strebulaev) for helpful comments and suggestions. We also thank Terry O{\textquoteright}Brien for his editorial assistance. J.-Z.H. acknowledges a Smeal Summer Research Grant for partial support.",
year = "2020",
doi = "10.1093/rof/rfz006",
language = "English (US)",
volume = "24",
pages = "45--98",
journal = "Review of Finance",
issn = "1572-3097",
publisher = "Oxford University Press",
number = "1",
}