Does Modeling Framework Matter?A Comparative Study of Structural and Reduced-Form Models

This study provides a rigorous empirical comparison of structural and reduced-formcredit risk frameworks. As major difference we focus on the discriminative modelingof the default time. In contrast to the previous literature, we calibrate both approaches to the same data set, apply comparable estimation techniques, and assessthe out-of-sample prediction quality on the same time series of CDS prices. As ourempirical implementations of both approaches rely on the same market informationwe are able to judge whether empirically the model structure itself makes an important difference. Interestingly, our study shows that the models' prediction powerare quite close on average indicating that for pricing purposes the modeling typedoes not greatly matter compared to the input data used. Still, the reduced-formapproach outperforms the structural for investment-grade names and longer maturities. In contrast the structural approach performs better for shorter maturitiesand sub-investment grade names.[...]