Kyle042678
New member
- Jun 18, 2026
- 0
- 0
Does anyone have a plain-English dumbed-down few-sentence explanation for getting on top of these models?
Structural model vs reduced form model
- Thread starter Kyle042678
- Start date
Structural model:
Assumptions:
- Balance sheet is simple with only one class of zero coupon bond
- Asset is actively traded on the market
- Risk free rate is constant
Reduced form:
- There is zero coupon liability traded on the market
- Risk free is stochastic (random, not constant)
- default risk depends on the economic conditions, which depend on non-constant variable => varies with business cycle
There are a lot of issues about this, but I feel like the assumptions are most likely tested
Assumptions:
- Balance sheet is simple with only one class of zero coupon bond
- Asset is actively traded on the market
- Risk free rate is constant
Reduced form:
- There is zero coupon liability traded on the market
- Risk free is stochastic (random, not constant)
- default risk depends on the economic conditions, which depend on non-constant variable => varies with business cycle
There are a lot of issues about this, but I feel like the assumptions are most likely tested