Abstract

The chapter is focused on the structural models of credit risk introducing basic concepts of risk-neutral world, as well as models and different options for the credit risk quantification. An important part is also the introduction of structural approach for credit risk modeling. Furthermore, the chapter presents basic division of structural models and then presents mathematical derivation of individual apparatuses of models. Among tested models are Merton model, KMV model, Black-Cox model, and Credit Grades model. The practical part is focused on the application of these models under the conditions of local emerging market--Slovakia. Additionally, it pointed out the connection between default probability and credit spreads generated with the use of default mode credit risk models. The main objective is to adjust credit risk model to real market data.

Highlights

  • The chapter is focused on the structural models of credit risk introducing basic concepts of riskneutral world, as well as models and different options for the credit risk quantification

  • It pointed out the connection between default probability and credit spreads generated with the use of default mode credit risk models

  • Credit Grades modeled in all cases different curves of default probability and credit spreads compared to other models based on the original Merton model

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Summary

Introduction

The chapter is focused on the structural models of credit risk introducing basic concepts of riskneutral world, as well as models and different options for the credit risk quantification. An important part is the introduction of structural approach for credit risk modeling. We present basic division of structural models and presents mathematical derivation of individual apparatuses of models. The practical part is focused on the application of these models under the conditions of local emerging market—Slovakia. It pointed out the connection between default probability and credit spreads generated with the use of default mode credit risk models. The main objective is to adjust credit risk model to real market data

Structural models of credit risk
Default mode models
Credit risk quantification with the use of default mode models
Own approach to determine the probability of default
Conclusion
Full Text
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