Credit Risk with asymmetric information on the default threshold

Caroline Hillairet (caroline.hillairet@polytechnique.edu) and Ying Jiao (ying.jiao@univ-lyon1.fr)
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Caroline Hillairet: CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Ying Jiao: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique

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Abstract: We study the impact of asymmetric information in a general credit model where the default is triggered when a fundamental diff usion process of the firm passes below a random threshold. Inspired by some recent technical default events during the fi nancial crisis, we consider the role of the firm's managers who choose the level of the default threshold and have complete information. However, other investors on the market only have partial observations either on the process or on the threshold. We specify the accessible information for di fferent types of investors. Besides the framework of progressive enlargement of fi ltrations usually adopted in the credit risk modelling, we also combine the results on initial enlargement of filtrations to deal with the uncertainty on the default threshold. We consider several types of investors who have di fferent information levels and we compute the default probabilities in each case. Numerical illustrations show that the insiders who have extra information on the default threshold obtain better estimations of the default probability compared to the standard market investors.

Keywords: credit risk; insider; enlargement of filtration (search for similar items in EconPapers)
Date: 2012
Note: View the original document on HAL open archive server: https://hal.science/hal-00663136v1
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Citations: View citations in EconPapers (4)

Published in Stochastics: An International Journal of Probability and Stochastic Processes, 2012, 84 (2-3), pp.183-198. ⟨10.1080/17442508.2011.575944⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00663136

DOI: 10.1080/17442508.2011.575944

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