Quotation Frey, Rüdiger, Rösler, Lars, Lu, Dan. 2019. Corporate security prices in structural credit risk models with incomplete information. Mathematical Finance. 29 84-116.


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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 Journal article
Journal Mathematical Finance
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, STRAT-B, VW-B, WH-B
Language English
Title Corporate security prices in structural credit risk models with incomplete information.
Volume 29
Year 2019
Page from 84
Page to 116
Reviewed? Y
URL https://onlinelibrary.wiley.com/doi/full/10.1111/mafi.12176
DOI http://dx.doi.org/10.1111/mafi.12176
Open Access N

Associations

People
Frey, Rüdiger (Details)
Rösler, Lars (Former researcher)
External
Lu, Dan (University of Leipzig, Leipzig, Germany)
Organization
Institute for Statistics and Mathematics IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
1118 Probability theory (Details)
1137 Financial mathematics (Details)
5361 Financial management (Details)
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