Expected Default Probabilities in Structural Models: Empirical Evidence

Kanak Patel () and Ricardo Pereira ()

The Journal of Real Estate Finance and Economics, 2007, vol. 34, issue 1, pages 107-133

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. Copyright Springer Science+Business Media, LLC 2007

Keywords: Expected default probabilities; Structural models; C30; G13; G33 (search for similar items in EconPapers)
Date: 2007
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Persistent link: http://EconPapers.repec.org/RePEc:kap:jrefec:v:34:y:2007:i:1:p:107-133

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