Default Ambiguity

Tolulope Fadina and Thorsten Schmidt
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Tolulope Fadina: Center for Mathematical Economics, Bielefeld University
Thorsten Schmidt: Center for Mathematical Economics, Bielefeld University

No 710, Center for Mathematical Economics Working Papers from 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.

Keywords: Model ambiguity; default time; credit risk; no-arbitrage; reduced- form HJM models; recovery process. (search for similar items in EconPapers)
Pages: 17
Date: 2025-06-24
New Economics Papers: this item is included in nep-rmg and nep-upt
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https://pub.uni-bielefeld.de/download/3004626/3004627 First Version, 2019 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:710

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