Default Prediction of Alternative Structural Credit Risk Models and Implications of Default Boundaries

While most of the empirical studies of structural credit risk models try to test the performance of structural models in bond and credit derivatives pricing, little results are provided for default prediction. Therefore, in this study, we empirically compare four structural credit risk models – for their default prediction capabilities. Our empirical results indicate that exogenous default boundaries, flat or exponential, are not crucial in default prediction. In contrast, modeling endogenous boundary has significant improvement in long term prediction for non-financial firms. However, we should note that the performance of the Leland model compared to the Merton model is weakened as the default prediction horizon shortened.