Comparison of Performance of Structural Models: Evidence from China

In order to further empirical study of the performance of structural models in China, this paper empirically tests four structural models of corporate bonds pricing: those of Merton (1974), modified Merton with exogenous recovery rate, Black and Cox (1976) and Leland and Toft (1996). The article implement these models by using a sample of 45 Chinese firms issuing short-term financing bonds in 2006. Empirical results show that the predicted spreads in four models are lower than actual spreads on average, particularly those of Merton model. Comparing the different models we find the spreads from Black and Cox (1976) and Leland and Toft (1996) are higher than the basic structural models, but accuracy is a problem. The modified Merton model can further improve Merton (1974)´s underestimation. The basic structural models including Merton (1974) and modified Merton can more comparatively catch the trend of movement of credit spreads than so-called extended models. The performance of recently developed structural models is not superior to the original Merton models. More accurate structural models must not only avoid underestimation but also improve the accuracy.