Credit Spreads and Incomplete Information
23 Pages Posted: 21 May 2008 Last revised: 10 Dec 2011
Date Written: September 25, 2008
Credit spreads and default policy are analyzed in a structural model. Agents have incomplete information about the company's EBIT process and observe it with time delays. When all agents observe the state variable with the same delay, it has a minor effect on credit spreads and default policy. Asymmetric information occurs when different agents observe the EBIT process with different time delays. Our model with only asymmetric information between bond- and equityholders produces qualitatively similar results as Duffiee and Lando (2001). Wider credit spreads are obtained in another model where we allow for trade of equity.
Keywords: Credit risk, credit spreads, delayed information, asymmetric information
JEL Classification: G12, G33
Suggested Citation: Suggested Citation