Modeling credit risk with partial information

Umut Cetin, Robert Jarrow (), P. Protter and Yildiray Yildirim

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This 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: default risk; Azéma martingale; Brownian excursions; default distribution (search for similar items in EconPapers)
JEL-codes: C1 F3 G3 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (37)

Published in Annals of Applied Probability, 2004, 14(3), pp. 1167-1178. ISSN: 1050-5164

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http://eprints.lse.ac.uk/2840/ Open access version. (application/pdf)

Related works:
Chapter: MODELING CREDIT RISK WITH PARTIAL INFORMATION (2008)
Working Paper: Modeling Credit Risk with Partial Information (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:2840

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