Structural Modelling of Credit Spreads on the European Bond Market: An Empirical Study
In a growing global corporate bond market, insights and understanding of the markets pricing mechanisms becomes increasingly important to investors. While previous research on credit risk has mainly focused on the American bond market, European bonds remain rather unexplored in academia. In this article, we investigate the explanatory power of a family of credit risk models - called structural modThis thesis empirically tests the explanatory power of structural models on the European corporate bond market. Using new evaluation methods, including LASSO and gradient boosting regression, we can provide an in-depth assessment of the models’ shortcomings. With these tools we show that the structural models tend to systematically overstate or understate the spread due to an oversensitivity to le