a b s t r a c t
Over the last four decades, a large number of structural models have been developed to estimate and
price credit risk. The focus of the paper is on a neglected issue pertaining to fundamental shifts in
the structural parameters governing default. We propose formal quality control procedures that allow
risk managers to monitor fundamental shifts in the structural parameters of credit risk models. The
procedures are sequential  hence apply in real time. The basic ingredients are the key processes used in
credit risk analysis, such as most prominently the Merton distance to default process as well as financial
returns. Moreover, while we propose different monitoring processes, we also show that one particular
process is optimal in terms of minimal detection time of a break in the drift process and relates to the
RadonNikodym derivative for a change of measure.
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