CREDIT RISK MODELS II: STRUCTURAL MODELS

Abstract

This paper provides a review of the structural approach for modelling credit risk, both considering the case of a single ...rm and the case with default dependences between ...rms. In the single ...rm case, we review the Merton (1974) model and First Passage Models, based on Black & Cox (1976), examining their main characteristics and extensions. In the second part of the text, we present some approaches to model default dependences between ...rms, which account for two types of default correlations: cyclical default correlation and contagion eects. We close the paper with a brief mention of factor models.

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