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August 2004 Modeling credit risk with partial information
Umut Çetin, Robert Jarrow, Philip Protter, Yıldıray Yıldırım
Ann. Appl. Probab. 14(3): 1167-1178 (August 2004). DOI: 10.1214/105051604000000251

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.

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Umut Çetin. Robert Jarrow. Philip Protter. Yıldıray Yıldırım. "Modeling credit risk with partial information." Ann. Appl. Probab. 14 (3) 1167 - 1178, August 2004. https://doi.org/10.1214/105051604000000251

Information

Published: August 2004
First available in Project Euclid: 13 July 2004

zbMATH: 1048.60048
MathSciNet: MR2071419
Digital Object Identifier: 10.1214/105051604000000251

Subjects:
Primary: 60G46 , 60H60 , 91B28

Keywords: Azéma martingale , Brownian excursions , default distribution , default risk

Rights: Copyright © 2004 Institute of Mathematical Statistics

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Vol.14 • No. 3 • August 2004
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