Agency Issues in Structural Credit Models - Evidences from Bank Industry

55 Pages Posted: 4 Feb 2008

See all articles by Hsien-Hsing Liao

Hsien-Hsing Liao

National Taiwan University

Tsung-Kang Chen

National Chiao Tung University

Chia-Wu Lu

National Taiwan University - Department of Finance

Wei-Ling Kuo

affiliation not provided to SSRN

Date Written: November 19, 2007

Abstract

We empirically examine the agency issues in structural credit models using bank data from 2001 to 2005. We find five independent agency related factors explaining the estimating errors of various structural models from 27% to 70%. They include factors of profit efficiency, cost efficiency, value, debt-equity, and one mitigating debt-equity agency problem. They are scarcely discussed in literature and should be incorporated into credit modeling. Different from previous empirical literature, we also find that, except the Collin-Dufresne and Goldstein (2001), the other three models underestimate default probabilities on average and the one with dynamic interest rate setting, the Longstaff and Schwartz (1995), performs the best.

Keywords: Credit Risk, Structural Form Models, Commercial Banks, Agency factors

JEL Classification: G21, G33

Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang and Lu, Chia-Wu and Kuo, Wei-Ling, Agency Issues in Structural Credit Models - Evidences from Bank Industry (November 19, 2007). Second Singapore International Conference on Finance 2008. Available at SSRN: https://ssrn.com/abstract=1089752 or http://dx.doi.org/10.2139/ssrn.1089752

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Tsung-Kang Chen

National Chiao Tung University ( email )

No. 1001, Dasyue Rd., East Dist.,
Hsinchu City, 300
Taiwan

Chia-Wu Lu

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Wei-Ling Kuo

affiliation not provided to SSRN

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