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Equilibrium model with default and insider's dynamic information

Author

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  • Luciano Campi

    () (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique, FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris-Dauphine - CREST - EDF R&D - Electricité de France Recherche et Développement)

  • Umut Cetin

    (Department of Statistics, LSE - LSE - London School of Economics and Political Science)

  • Albina Danilova

    (LSE - Department Mathematics [London] - LSE - London School of Economics and Political Science)

Abstract

We consider an equilibrium model á la Kyle-Back for a defaultable claim issued by a given firm. In such a market the insider observes \emph{continuously in time} the value of firm, which is unobservable by the market maker. Using the construction of a dynamic Bessel bridge of dimension $3$ in Campi, \c Cetin and Danilova (2010), we provide the equilibrium price and the optimal insider's strategy. As in Campi and \c Cetin (2007), the information released by the insider while trading optimally makes the default time predictable in market's view at the equilibrium. We conclude the paper by comparing the insider's expected profits in the static and dynamic private information case. We also compute explicitly the value of insider's information in the special cases of a defaultable stock and a bond.

Suggested Citation

  • Luciano Campi & Umut Cetin & Albina Danilova, 2011. "Equilibrium model with default and insider's dynamic information," Working Papers hal-00613216, HAL.
  • Handle: RePEc:hal:wpaper:hal-00613216 Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00613216
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    References listed on IDEAS

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    1. Kerry Back & Hal Pedersen, 1995. "Long-Lived Information and Intraday Patterns," Finance 9507008, EconWPA.
    2. Luciano Campi & Umut Çetin, 2007. "Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling," Finance and Stochastics, Springer, vol. 11(4), pages 591-602, October.
    3. Xin Guo & Robert Jarrow & Haizhi Lin, 2008. "Distressed debt prices and recovery rate estimation," Review of Derivatives Research, Springer, pages 171-204.
    4. Back, Kerry & Pedersen, Hal, 1998. "Long-lived information and intraday patterns," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 385-402, September.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Christian Leuz & Karl V. Lins & Francis E. Warnock, 2010. "Do Foreigners Invest Less in Poorly Governed Firms?," Review of Financial Studies, Society for Financial Studies, pages 3245-3285.
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    1. Campi, Luciano & Cetin, Umut & Danilova, Albina, 2013. "Explicit construction of a dynamic Bessel bridge of dimension 3," LSE Research Online Documents on Economics 45263, London School of Economics and Political Science, LSE Library.

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