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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

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    File URL: https://pub.uni-bielefeld.de/download/3004626/3004627
    File Function: First Version, 2019
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    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. 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.
    3. Rüdiger Frey & Thorsten Schmidt, 2009. "Pricing Corporate Securities Under Noisy Asset Information," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 403-421, July.
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