Modeling Credit Risk with Partial Information
Probability
2008-12-02 v1 Risk Management
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 Azema martingale, and we use excursion theory of Brownian motions to price risky debt.
Keywords
Cite
@article{arxiv.math/0407060,
title = {Modeling Credit Risk with Partial Information},
author = {Umut Cetin and Robert Jarrow and Philip Protter and Yildiray Yildirim},
journal= {arXiv preprint arXiv:math/0407060},
year = {2008}
}