Modeling Credit Risk with Partial Information
This 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 Azema martingale, and we use excursion theory of Brownian motions to price risky debt.
|Date of creation:||Jul 2004|
|Date of revision:|
|Publication status:||Published in Annals of Applied Probability 2004, Vol. 14, No. 3, 1167-1178|
|Contact details of provider:|| Web page: http://arxiv.org/|
References listed on IDEAS
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- Philip Protter & Michael Dritschel, 1999. "Complete markets with discontinuous security price," Finance and Stochastics, Springer, vol. 3(2), pages 203-214.
- Robert A. Jarrow, 2001.
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