The book says that the reduced model imposes assumptions on the output of the structural model.
What do they mean by this? Specifically, what exactly is the output of the structrual model and how does it explicitly relate to credit risk?
I think you should read the whole section over again… question is too broad a and I doubt anyone can help.
There’s 3 credit models that the material talks about, Reduced Form, Structural and the credit systems. They have various assumptions, weaknesses, and strengths.
Reduced form models make assumptions about the probability of default and loss given default that structural models don’t make.
Structural models make assumptions about the company’s balance sheet that reduced form models don’t make.