Pricing Risky Debt : An Empirical Comparison of the Longstaff and Schwartz and Merton Models

The authors compare two term structure models using Eurodollar data from 1992. While both models are restrictive for money market securities because they model the arrival time of default as a predictable process, the Merton model has some advantages over the Longstaff-Schwartz model. The LS model is also more difficult to estimate, because of a large number of parameters, complex model structures, and intensive calculation requirements. Neither model, however, can generate the quot;Nquot;-shaped credit term structure that prevailed in the Eurodollar market during 1992