Quotation Frey, Rüdiger. 2014. Structural Credit Risk Models under Incomplete Information and the Pricing of Contingent Convertibles. Lisbon Finance Seminars, Lissabon, Portugal, 09.05.2014. Invited Talk


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Abstract

The paper studies 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. We therefore transform the problem 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. Moreover, we give an explicit description of the dynamics of corporate security prices. Finally, we explain how the model can be applied to the pricing of bond and equity options and we present results from a number of numerical experiments.

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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 Structural Credit Risk Models under Incomplete Information and the Pricing of Contingent Convertibles
Event Lisbon Finance Seminars
Year 2014
Date 09.05.2014
Country Portugal
Location Lissabon
URL http://www.clsbe.lisboa.ucp.pt/site/custom/template/fceetplgeneric.asp?sspageID=402&lang=2
Invited Talk Y

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