The economic default time and the Arcsine law
AbstractThis paper develops a structural credit risk model to characterize the difference between the economic and recorded default times for a firm. Recorded default occurs when default is recorded in the legal system. The economic default time is the last time when the firm is able to pay off its debt prior to the legal default time. It has been empirically documented that these two times are distinct (see Guo, Jarrow, and Lin (2008)). In our model, the probability distribution for the time span between economic and recorded defaults follows a mixture of Arcsine Laws, which is consistent with the results contained in Guo, Jarrow, and Lin. In addition, we show that the classical structural model is a limiting case of our model as the time period between debt repayment dates goes to zero. As a corollary, we show how the firm value process's parameters can be estimated using the tail index and correlation structure of the firm's return.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1012.0843.
Date of creation: Dec 2010
Date of revision: Jan 2011
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.