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.
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- 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.
- 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..
- Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
- Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
- Philip Protter & Michael Dritschel, 1999. "Complete markets with discontinuous security price," Finance and Stochastics, Springer, vol. 3(2), pages 203-214. Full references (including those not matched with items on IDEAS)
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