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Filtering Credit Risk with Stochastic Discontinuities

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  • F'elix B. Tambe-Ndonfack

Abstract

We develop a structural credit-risk model under incomplete information in which investors observe firm value only indirectly through noisy market signals and scheduled corporate disclosures. While disclosure dates are known in advance, their informational content is random, leading to stochastic discontinuities in the observation process. We derive the Kushner-Stratonovich equation for structural credit-risk models with endogenous default by applying the nonlinear filtering framework with predictable jumps. We then study the valuation and local risk-minimization hedging for default-sensitive securities under partial information. The interaction between predictable disclosure events and endogenous default produces discrete adjustments in the conditional default compensator, leading to announcement-driven distortions in credit spreads and hedge ratios that are absent from classical diffusion-based and inaccessible-jump models. Numerical experiments illustrate how scheduled disclosures affect filtered default probabilities, Credit Default Swaps (CDS) spreads, and hedging strategies, generating characteristic pre-announcement dynamics in credit spreads.

Suggested Citation

  • F'elix B. Tambe-Ndonfack, 2026. "Filtering Credit Risk with Stochastic Discontinuities," Papers 2608.19221, arXiv.org.
  • Handle: RePEc:arx:papers:2608.19221
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    References listed on IDEAS

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