The Annals of Applied Probability

Modeling credit risk with partial information

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

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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

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

First available in Project Euclid: 13 July 2004

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

Default risk Azéma martingale Brownian excursions default distribution


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.

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