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Modeling Credit Risk With Partial Information

In: Financial Derivatives Pricing Selected Works of Robert Jarrow

Listed author(s):
  • UMUT ÇETIN

    (Center for Applied Mathematics, Cornell University, Ithaca, New York 14853-3801, USA)

  • ROBERT JARROW

    (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853-3801, USA)

  • PHILIP PROTTER

    (Operations Research and Industrial Engineering Department, Cornell University, Ithaca, New York 14853-3801, USA)

  • YILDIRAY YILDIRIM

    (School of Management, Syracuse University, Syracuse, New York 13244, USA)

AbstractThis paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633–664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager's information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager's information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azéma martingale, and we use excursion theory of Brownian motions to price risky debt.

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File URL: http://www.worldscientific.com/doi/pdf/10.1142/9789812819222_0023
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File URL: http://www.worldscientific.com/doi/abs/10.1142/9789812819222_0023
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This chapter was published in:
  • Robert A Jarrow, 2008. "Financial Derivatives Pricing:Selected Works of Robert Jarrow," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6911, 04.
  • This item is provided by World Scientific Publishing Co. Pte. Ltd. in its series World Scientific Book Chapters with number 9789812819222_0023.
    Handle: RePEc:wsi:wschap:9789812819222_0023
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    1. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-625, July.
    2. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    3. Robert A. Jarrow & Fan Yu, 2008. "Counterparty Risk and the Pricing of Defaultable Securities," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515 World Scientific Publishing Co. Pte. Ltd..
    4. Philip Protter & Michael Dritschel, 1999. "Complete markets with discontinuous security price," Finance and Stochastics, Springer, vol. 3(2), pages 203-214.
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