Default Ambiguity

Tolulope Fadina and Thorsten Schmidt
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Tolulope Fadina: Department of Mathematical Stochastics, University of Freiburg, Ernst-Zermelo Str.1, 79104 Freiburg im Breisgau, Germany
Thorsten Schmidt: Department of Mathematical Stochastics, University of Freiburg, Ernst-Zermelo Str.1, 79104 Freiburg im Breisgau, Germany

Risks, 2019, vol. 7, issue 2, 1-17

Abstract: This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in 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)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:7:y:2019:i:2:p:64-:d:238522

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