What is the key problem with the structural model?

Question

Quizplus · Accepted Answer

The key problem with the structural model is that it assumes the assets of the firm trade in frictionless and competitive markets, which is unrealistic in practice. In reality, asset prices are subject to various forms of market frictions and imperfections, such as transaction costs, bid-ask spreads, liquidity risk, and institutional factors. Therefore, the structural model may not capture the true risk and value of the firm's assets, which could result in inaccurate predictions of default probabilities and credit spreads.

What Is the Key Problem with the Structural Model