MODELING CREDIT RISK WITH PARTIAL INFORMATION

Umut Çetin, Robert Jarrow (), Philip Protter and Yildiray Yildirim
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Umut Çetin: Center for Applied Mathematics, Cornell University, Ithaca, New York 14853-3801, USA
Philip Protter: Operations Research and Industrial Engineering Department, Cornell University, Ithaca, New York 14853-3801, USA

Chapter 23 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 579-590 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633–664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager's information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager's information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azéma martingale, and we use excursion theory of Brownian motions to price risky debt.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Related works:
Working Paper: Modeling Credit Risk with Partial Information (2004)
Working Paper: Modeling credit risk with partial information (2004)
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