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Expected Default Probabilities in Structural Models: Empirical Evidence

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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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Authors and Affiliations

  1. Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge, CB3 9EP, UK

    Kanak Patel & Ricardo Pereira

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  1. Kanak Patel
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  2. Ricardo Pereira
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Correspondence to Kanak Patel.

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Patel, K., Pereira, R. Expected Default Probabilities in Structural Models: Empirical Evidence. J Real Estate Finan Econ 34, 107–133 (2007). https://doi.org/10.1007/s11146-007-9006-1

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  • DOI: https://doi.org/10.1007/s11146-007-9006-1

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