Next Article in Journal / Special Issue
Application of Vine Copulas to Credit Portfolio Risk Modeling
Previous Article in Journal
VaR and CVaR Implied in Option Prices
Article Menu

Export Article

Open AccessArticle
J. Risk Financial Manag. 2016, 9(2), 3;

Revisiting Structural Modeling of Credit Risk—Evidence from the Credit Default Swap (CDS) Market

Saunders College of Business, Rochester Institute of Technology, Rochester, NY 14623, USA
Federal Reserve Bank of Atlanta, Atlanta, GA 30309, USA
Author to whom correspondence should be addressed.
Academic Editor: Jingzhi Huang
Received: 19 January 2016 / Revised: 28 March 2016 / Accepted: 27 April 2016 / Published: 10 May 2016
(This article belongs to the Special Issue Credit Risk)
Full-Text   |   PDF [1374 KB, uploaded 10 May 2016]   |  


The ground-breaking Black-Scholes-Merton model has brought about a generation of derivative pricing models that have been successfully applied in the financial industry. It has been a long standing puzzle that the structural models of credit risk, as an application of the same modeling paradigm, do not perform well empirically. We argue that the ability to accurately compute and dynamically update hedge ratios to facilitate a capital structure arbitrage is a distinctive strength of the Black-Scholes-Merton’s modeling paradigm which could be utilized in credit risk models as well. Our evidence is economically significant: We improve the implementation of a simple structural model so that it is more suitable for our application and then devise a simple capital structure arbitrage strategy based on the model. We show that the trading strategy persistently produced substantial risk-adjusted profit. View Full-Text
Keywords: credit risk; structural models; credit default swap credit risk; structural models; credit default swap

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

Share & Cite This Article

MDPI and ACS Style

Huang, Z.J.; Luo, Y. Revisiting Structural Modeling of Credit Risk—Evidence from the Credit Default Swap (CDS) Market. J. Risk Financial Manag. 2016, 9, 3.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics



[Return to top]
J. Risk Financial Manag. EISSN 1911-8074 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top