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Modeling Credit Risk with Partial Information

Umut Cetin·Robert Jarrow·Philip Protter·Yildiray Yildirim
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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 Azema martingale, and we use excursion theory of Brownian motions to price risky debt.

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BibTeXRIS

Umut Cetin, Robert Jarrow, Philip Protter, Yildiray Yildirim. 2004-07-05. Modeling Credit Risk with Partial Information. https://doi.org/10.1214/105051604000000251

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