The economic default time and the Arcsine law

Xin Guo, Robert Jarrow () and Adrien de Larrard

Papers from arXiv.org

Abstract: This paper develops a structural credit risk model to characterize the difference between the economic and recorded default times for a firm. Recorded default occurs when default is recorded in the legal system. The economic default time is the last time when the firm is able to pay off its debt prior to the legal default time. It has been empirically documented that these two times are distinct (see Guo, Jarrow, and Lin (2008)). In our model, the probability distribution for the time span between economic and recorded defaults follows a mixture of Arcsine Laws, which is consistent with the results contained in Guo, Jarrow, and Lin. In addition, we show that the classical structural model is a limiting case of our model as the time period between debt repayment dates goes to zero. As a corollary, we show how the firm value process's parameters can be estimated using the tail index and correlation structure of the firm's return.

Date: 2010-12, Revised 2011-01
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (1)

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Journal Article: The economic default time and the arcsine law (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1012.0843

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