Expected Default Probabilities in Structural Models: Empirical Evidence |
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Authors: | Kanak Patel Ricardo Pereira |
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Institution: | (1) Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge, CB3 9EP, UK |
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Abstract: | We apply a set of structural models (Black and Cox 1976; Collin-Dufresne and Goldstein 2001; Ericsson and Reneby 1998; Leland
and Toft 1996; Longstaff and Schwartz 1995; Merton 1974) to estimate expected default probabilities (EDPs) for a sample of
failed and non-failed UK real estate companies. Results are generally consistent with models’ predictions and estimates of
EDPs for different models are closely clustered. The results of z-scores and synthetic ratings misclassify 33% of the total
sample in contrast to 8% misclassification by structural models. Further analysis of EDPs based on logistic regressions suggests
the observed misclassification of the companies by structural models is due to special company management and/or regulatory
circumstances rather than limitations of these models.
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Keywords: | Expected default probabilities Structural models |
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