Credit Spreads and Incomplete Information

23 Pages Posted: 21 May 2008 Last revised: 10 Dec 2011

See all articles by Snorre Lindset

Snorre Lindset

Norwegian University of Science and Technology (NTNU)

Arne-Christian Lund

Norwegian School of Economics (NHH) - Department of Business and Management Science

Svein-Arne Persson

Norwegian School of Economics (NHH)

Date Written: September 25, 2008

Abstract

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

Lindset, Snorre and Lund, Arne-Christian and Persson, Svein-Arne, Credit Spreads and Incomplete Information (September 25, 2008). NHH Dept. of Finance & Management Science Discussion Paper No. 2008/9. Available at SSRN: https://ssrn.com/abstract=1135591 or http://dx.doi.org/10.2139/ssrn.1135591

Snorre Lindset

Norwegian University of Science and Technology (NTNU) ( email )

Trondheim NO-7491
Norway
+4773591395 (Phone)

Arne-Christian Lund

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Svein-Arne Persson (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
47-55-95-90-00 (Phone)
47-55-95-96-47 (Fax)

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