Structural credit risk models with subordinated processes

Abstract

We discuss structural models based on Merton's framework. First, we observe that the classical assumptions of the Merton model are generally rejected. Secondly, we implement a structural credit risk model based on stable non-Gaussian processes as a representative of subordinated models in order to overcome some drawbacks of the Merton one. Finally, following the KMV-Merton estimation methodology, we propose an empirical comparison between the results obtained from the classical KMV-Merton model and the stable Paretian one. In particular, we suggest alternative parameter estimation for subordinated processes, and we optimize the performance for the stable Paretian model.