EMPIRICAL EVIDENCE: COMPLETE VS. INCOMPLETE INFORMATION CREDIT RISK MODELS

In the present structural credit risk model based on incomplete information, investors cannot observe the firm's default barrier. As a consequence, such a model has both the economic appeal of a structural model and the tractable pricing formulas and empirical plausibility of a reduced-form model. A comparison of default probability and credit spread forecasts generated by this model, and Black Cox and Merton structural models, using the evolution of SIF Banat firm within the period August 2007 November 2009, indicates that it reacts more quickly to new information and, unlike the other two models, it forecasts positive short-term credit spreads.