Intensity process for a pure jump Lévy structural model with incomplete information

Xin Dong and Harry Zheng

Stochastic Processes and their Applications, 2015, vol. 125, issue 4, 1307-1322

Abstract: In this paper we discuss a credit risk model with a pure jump Lévy process for the asset value and an unobservable random barrier. The default time is the first time when the asset value falls below the barrier. Using the indistinguishability of the intensity process and the likelihood process, we prove the existence of the intensity process of the default time and find its explicit representation in terms of the distance between the asset value and its running minimal value. We apply the result to find the instantaneous credit spread process and illustrate it with a numerical example.

Keywords: Pure jump Lévy process; Unobservable random barrier; First passage time; Path-dependent intensity process (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.spa.2014.10.016

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