Default Hazards and the Term Structure of Credit Spreads in a Duopoly
This paper shows how default hazards similar to those suggested by the literature on reduced form credit risk models may arise purely from the strategic behavior of indebted firms operating in a duopoly. In so doing, our research advances attempts to reconcile structural and reduced form approaches to modelling credit risk. In equilibrium, firm defaults are generated endogenously by a randomly evolving intensity and short credit spreads are strictly positive. We generalize the model to allow for incomplete information concerning firm types and show how this leads to default intensities that evolve in a path-dependent manner through Bayesian learning.
|Date of creation:||2001|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.finance.ox.ac.uk|
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:sbs:wpsefe:2001mf06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett)
If references are entirely missing, you can add them using this form.