Modeling Credit Risk with Partial Information

Annals of Applied Probability, Forthcoming

Johnson School Research Paper Series No. 4-2013

14 Pages Posted: 14 Nov 2012 Last revised: 7 Feb 2013

See all articles by Umut Cetin

Umut Cetin

Cornell University - Cornell Theory Center (CTC)

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Philip Protter

Columbia University

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: March 26, 2004

Abstract

This paper provides an alternative approach to Duffie and Lando (2001) 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 Azema martingale, and we use excursion theory of Brownian motions to price risky debt.

Keywords: Default risk, Azema martinglae, Brownian excursion

JEL Classification: G12, G33

Suggested Citation

Cetin, Umut and Jarrow, Robert A. and Protter, Philip and Yildirim, Yildiray, Modeling Credit Risk with Partial Information (March 26, 2004). Annals of Applied Probability, Forthcoming; Johnson School Research Paper Series No. 4-2013. Available at SSRN: https://ssrn.com/abstract=2175028 or http://dx.doi.org/10.2139/ssrn.2175028

Umut Cetin

Cornell University - Cornell Theory Center (CTC) ( email )

Ithaca, NY
United States

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Philip Protter

Columbia University ( email )

Mail Code 4403
New York, NY 10027
United States
2128511245 (Phone)
2128512164 (Fax)

HOME PAGE: http://www.stat.columbia.edu/~protter/

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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