On the calibration of structural credit spread models

Howard Qi, Sheen Liu, Chunchi Wu

Research output: Contribution to journalArticlepeer-review


Empirical findings are mixed about the performance of structural models for term structure of credit spreads. It is commonly believed that all structural models have equally poor performance after calibration. However, proper calibration is not a trivial issue, especially for highly structural models. This paper proposes a more accurate procedure for calibrating two models: Leland-Toft (J Finance 51:987-1019, 1996) and Collin-Dufresne and Goldstein (J Finance 56:2177-2208, 2001). Using rating-based bond data, we find that the Leland-Toft model has significantly greater explanatory power for credit spreads across rating categories than previously reported. We provide theoretical explanations for these findings, and further extend our empirical analysis to include 286 individual senior bonds. Our findings help clarify the controversies over the performance of structural models in general and that of the Leland-Toft model in particular. In addition, we offer a rigorous procedure that can be used for calibrating other structural models more effectively.

Original languageEnglish (US)
Pages (from-to)189-208
Number of pages20
JournalAnnals of Finance
Issue number2
StatePublished - 2009
Externally publishedYes


  • Calibration
  • Capital structure
  • Credit spread
  • Default
  • Termstructure

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance
  • Finance


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