Lindset, Snorre () (Trondheim Business School) Lund, Arne-Christian () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) Persson, Svein-Arne () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
Abstract
A new model is presented which produces credit spreads that do not converge to zero for short maturities. Our set-up includes incomplete, i.e., delayed and asymmetric information. When the financial market observes the company's earnings with a delay, the effect on both default policy and credit spreads is negligible, compared to the Leland (1994) model. When information is asymmetrically distributed between the management of the company and the financial market, short credit spreads do not converge to zero. This is result is similar to the Duffie and Lando (2001) model, although our simpler model improves some limitations in their set-up. Short interest rates from our model are used to illustrate effects similar to the dry-up in the interbank market experienced after the summer of 2007.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. 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.
Publisher Info
Paper provided by Department of Finance and Management Science, Norwegian School of Economics and Business Administration in its series Discussion Papers with number
2008/9.
Length: 39 pages Date of creation: 12 Mar 2008 Date of revision: Handle: RePEc:hhs:nhhfms:2008_009
Contact details of provider: Postal: NHH, Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway Phone: +47 55 95 92 93 Fax: +47 55 95 96 50 Email: Web page: http://www.nhh.no/for/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Stein Fossen).
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: