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.
@article{1089736281,
author = {\c Cetin, Umut and Jarrow, Robert and Protter, Philip and Y\i ld\i r\i m, Y\i ld\i ray},
title = {Modeling credit risk with partial information},
journal = {Ann. Appl. Probab.},
volume = {14},
number = {1},
year = {2004},
pages = { 1167-1178},
language = {en},
url = {http://dml.mathdoc.fr/item/1089736281}
}
Çetin, Umut; Jarrow, Robert; Protter, Philip; Yıldırım, Yıldıray. Modeling credit risk with partial information. Ann. Appl. Probab., Tome 14 (2004) no. 1, pp. 1167-1178. http://gdmltest.u-ga.fr/item/1089736281/