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Equilibrium model with default and insider's dynamic information

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  • Luciano Campi

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX, FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX)

  • Umut Cetin

    (Department of Statistics, LSE - London School of Economics)

  • Albina Danilova

    (Department of Mathematics, LSE - London School of Economics)

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    Abstract

    We consider an equilibrium model á la Kyle-Back for a defaultable claim issued by a given firm. In such a market the insider observes \emph{continuously in time} the value of firm, which is unobservable by the market maker. Using the construction of a dynamic Bessel bridge of dimension $3$ in Campi, \c Cetin and Danilova (2010), we provide the equilibrium price and the optimal insider's strategy. As in Campi and \c Cetin (2007), the information released by the insider while trading optimally makes the default time predictable in market's view at the equilibrium. We conclude the paper by comparing the insider's expected profits in the static and dynamic private information case. We also compute explicitly the value of insider's information in the special cases of a defaultable stock and a bond.

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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00613216.

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    Date of creation: 03 Aug 2011
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    Handle: RePEc:hal:wpaper:hal-00613216

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    1. Back, Kerry & Pedersen, Hal, 1998. "Long-lived information and intraday patterns," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 385-402, September.
    2. Luciano Campi & Umut Çetin, 2007. "Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling," Finance and Stochastics, Springer, vol. 11(4), pages 591-602, October.
    3. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    4. Xin Guo & Robert Jarrow & Haizhi Lin, 2008. "Distressed debt prices and recovery rate estimation," Review of Derivatives Research, Springer, vol. 11(3), pages 171-204, October.
    5. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
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    Cited by:
    1. Luciano Campi & Umut Cetin & Albina Danilova, 2013. "Explicit construction of a dynamic Bessel bridge of dimension 3," LSE Research Online Documents on Economics 45263, London School of Economics and Political Science, LSE Library.

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