Annals of Finance

, Volume 5, Issue 2, pp 189–208 | Cite as

On the calibration of structural credit spread models

  • Howard QiEmail author
  • Sheen Liu
  • Chunchi Wu
Research Article


Empirical findings are mixed about the performance of structural models for term structure of credit spreads. It is commonly believed that all structural models have equally poor performance after calibration. However, proper calibration is not a trivial issue, especially for highly structural models. This paper proposes a more accurate procedure for calibrating two models: Leland–Toft (J Finance 51:987–1019, 1996) and Collin-Dufresne and Goldstein (J Finance 56:2177–2208, 2001). Using rating-based bond data, we find that the Leland–Toft model has significantly greater explanatory power for credit spreads across rating categories than previously reported. We provide theoretical explanations for these findings, and further extend our empirical analysis to include 286 individual senior bonds. Our findings help clarify the controversies over the performance of structural models in general and that of the Leland–Toft model in particular. In addition, we offer a rigorous procedure that can be used for calibrating other structural models more effectively.


Calibration Term structure Capital structure Default Credit spread 

JEL Classification

G12 G13 G30 G32 


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Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  1. 1.School of Business and EconomicsMichigan Technological UniversityHoughtonUSA
  2. 2.Washington State University-VancouverVancouverUSA
  3. 3.University of Missouri-ColumbiaColumbiaUSA

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