Default Hazards and the Term Structure of Credit Spreads in a Duopoly
AbstractThis paper shows how default hazards similar to those suggested by the literature on reduced form credit risk models may arise purely from the strategic behavior of indebted firms operating in a duopoly. In so doing, our research advances attempts to reconcile structural and reduced form approaches to modelling credit risk. In equilibrium, firm defaults are generated endogenously by a randomly evolving intensity and short credit spreads are strictly positive. We generalize the model to allow for incomplete information concerning firm types and show how this leads to default intensities that evolve in a path-dependent manner through Bayesian learning.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2001mf06.
Date of creation: 2001
Date of revision:
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