Quotation Frey, Rüdiger. 2012. Dynamics of Corporate Security Prices and Option Pricing in Firm Value Models with Incomplete Information. Actuarial and Financial Mathematics Conference 2012, Brussels, Belgien, 09.02-10.02.


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Abstract

This talk is concerned with structural credit risk models with incomplete information of the asset value. It is shown that the pricing of typical corporate securities such as equity, corporate bonds or CDSs leads to a nonlinear filtering problem. This problem cannot be tackled with standard techniques as the default time does not have an intensity under full information. Using the Dellacherie-formula the problem is transformed to a standard filtering problem for a stopped diffusion process. This problem is analyzed via SPDE results from the filtering literature. In particular we are able to characterize the default intensity under incomplete information in terms of the conditional density of the asset value process, thereby generalizing an earlier result of Duffie and Lando (2001). Moreover, we give an explicit description of the dynamics of corporate security prices. The last part is devoted to applications of the model in the pricing of bond and equity options.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title Dynamics of Corporate Security Prices and Option Pricing in Firm Value Models with Incomplete Information
Event Actuarial and Financial Mathematics Conference 2012
Year 2012
Date 09.02-10.02
Country Belgium
Location Brussels
URL http://www.afmathconf.ugent.be/index.php?page=programme

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Frey, Rüdiger (Details)
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Institute for Statistics and Mathematics IN (Details)
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