Expected Default Probabilities in Structural Models: Empirical Evidence

Expected Default Probabilities in Structural Models: Empirical Evidence 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Expected Default Probabilities in Structural Models: Empirical Evidence

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Publisher
Kluwer Academic Publishers-Plenum Publishers
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-007-9006-1
Publisher site
See Article on Publisher Site

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.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Mar 8, 2007

References

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