IDEAS home Printed from https://ideas.repec.org/p/bie/wpaper/710.html

Default Ambiguity

Author

Listed:
  • Fadina, Tolulope

    (Center for Mathematical Economics, Bielefeld University)

  • Schmidt, Thorsten

    (Center for Mathematical Economics, Bielefeld University)

Abstract

This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty on the default intensity but also discuss uncertainty on the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath-Jarrow-Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.

Suggested Citation

  • Fadina, Tolulope & Schmidt, Thorsten, 2025. "Default Ambiguity," Center for Mathematical Economics Working Papers 710, Center for Mathematical Economics, Bielefeld University.
    • Handle: RePEc:bie:wpaper:710
    as

    Download full text from publisher

    File URL: https://pub.uni-bielefeld.de/download/3004626/3004627
    File Function: First Version, 2019
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    2. Rüdiger Frey & Thorsten Schmidt, 2009. "Pricing Corporate Securities Under Noisy Asset Information," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 403-421, July.
    3. Frank Riedel, 2015. "Financial economics without probabilistic prior assumptions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(1), pages 75-91, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tolulope Fadina & Thorsten Schmidt, 2019. "Default Ambiguity," Risks, MDPI, vol. 7(2), pages 1-17, June.
    2. Umut c{C}etin, 2012. "On absolutely continuous compensators and nonlinear filtering equations in default risk models," Papers 1205.1154, arXiv.org.
    3. Rüdiger Frey & Thorsten Schmidt, 2012. "Pricing and hedging of credit derivatives via the innovations approach to nonlinear filtering," Finance and Stochastics, Springer, vol. 16(1), pages 105-133, January.
    4. Frank Gehmlich & Thorsten Schmidt, 2014. "Dynamic Defaultable Term Structure Modelling beyond the Intensity Paradigm," Papers 1411.4851, arXiv.org, revised Jul 2015.
    5. Çetin, Umut, 2012. "On absolutely continuous compensators and nonlinear filtering equations in default risk models," Stochastic Processes and their Applications, Elsevier, vol. 122(11), pages 3619-3647.
    6. Fontana, Claudio & Schmidt, Thorsten, 2018. "General dynamic term structures under default risk," Stochastic Processes and their Applications, Elsevier, vol. 128(10), pages 3353-3386.
    7. Lin, Yan-Ting & Nienhaus, Martin, 2015. "The non-diversifiable risk of financial reporting system: Evidence from the German market," Advances in accounting, Elsevier, vol. 31(2), pages 197-208.
    8. Rubesam, Alexandre & Zimmermann, Paul, 2025. "Sideshow or center stage? Information transmission between CDS and equity markets," Journal of Financial Intermediation, Elsevier, vol. 63(C).
    9. Delia Coculescu & Monique Jeanblanc & Ashkan Nikeghbali, 2012. "Default times, no-arbitrage conditions and changes of probability measures," Finance and Stochastics, Springer, vol. 16(3), pages 513-535, July.
    10. Sandrine Gumbel & Thorsten Schmidt, 2021. "Defaultable term structures driven by semimartingales," Papers 2103.01577, arXiv.org, revised Aug 2021.
    11. Hidetoshi Nakagawa & Tomoaki Shouda, 2004. "Analyses of Mortgage-Backed Securities Based on Unobservable Prepayment Cost Processes," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(3), pages 233-266, September.
    12. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    13. Chen, Peimin & Wu, Chunchi, 2014. "Default prediction with dynamic sectoral and macroeconomic frailties," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 211-226.
    14. Hilscher, Jens & Raviv, Alon, 2014. "Bank stability and market discipline: The effect of contingent capital on risk taking and default probability," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 542-560.
    15. Thomas R. Hurd & Zhuowei Zhou, 2011. "Two-factor capital structure models for equity and credit," Papers 1110.5846, arXiv.org.
    16. Peter Spencer, 2013. "Modeling US bank CDS spreads during the Global Financial Crisis with a deferred filtration pricing model," Discussion Papers 13/18, Department of Economics, University of York.
    17. Jarrow, Robert & Li, Haitao & Liu, Sheen & Wu, Chunchi, 2010. "Reduced-form valuation of callable corporate bonds: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 95(2), pages 227-248, February.
    18. Elisa Luciano & Wim Schoutens, 2006. "A multivariate jump-driven financial asset model," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 385-402.
    19. M. Hashem Pesaran & Til Schuermann & Bjorn-Jakob Treutler, 2007. "Global Business Cycles and Credit Risk," NBER Chapters, in: The Risks of Financial Institutions, pages 419-469, National Bureau of Economic Research, Inc.
    20. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bie:wpaper:710. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bettina Weingarten (email available below). General contact details of provider: https://edirc.repec.org/data/imbiede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.