The Annals of Applied Probability

Modeling credit risk with partial information

Umut Çetin, Robert Jarrow, Philip Protter, and Yıldıray Yıldırım

Full-text: Open access

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.

Article information

Source
Ann. Appl. Probab., Volume 14, Number 3 (2004), 1167-1178.

Dates
First available in Project Euclid: 13 July 2004

Permanent link to this document
https://projecteuclid.org/euclid.aoap/1089736281

Digital Object Identifier
doi:10.1214/105051604000000251

Mathematical Reviews number (MathSciNet)
MR2071419

Zentralblatt MATH identifier
1048.60048

Subjects
Primary: 60H60 60G46: Martingales and classical analysis 91B28

Keywords
Default risk Azéma martingale Brownian excursions default distribution

Citation

Çetin, Umut; Jarrow, Robert; Protter, Philip; Yıldırım, Yıldıray. Modeling credit risk with partial information. Ann. Appl. Probab. 14 (2004), no. 3, 1167--1178. doi:10.1214/105051604000000251. https://projecteuclid.org/euclid.aoap/1089736281


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