Structural model

[shanlane]

Hello,

I appologize for the really bad question, but I cannot find a strict definition of what a "structural model" actually is. The term is used all over this curriculum, but I cannot find what differentiates a structural from a non-structural model.

Thanks in advance and sorry again for the really bad question.

Shannon

 

[David Harper CFA FRM]

Hi Shannon,

I don't think it's a bad question, at all. I think two or three years ago, I spent like a whole day trying to cross-reference and pin down the definition. It's actually less prominent than it used to be in the course, believe it or not .... I'd love to get better expert input, but i came up with the diagram I just used on operational 7a, p53:

where i located in the same/similar exogenous vs. endogenous distinction we experience in liquidity. But specifically, I've experienced "structural" to almost only refer (in practice) to Merton model for credit risk, as an example of a structural model for credit. As opposed to reduced-form credit model which treat default as an "exogenous" variable by assuming a hazard rate/default intensity. So, I think the idea is something like: rather than modeling default as an external variable (an external input), a structural model "infers" default via the firm's "internal" asset & liability variables (I often wonder if "structural" might refer to "capital structure" but i have *never* seen that ....) . Not sure i've got it precisely