Frey, Rüdiger, Rösler, Lars, Lu, Dan. 2019. Corporate security prices in structural credit risk models with incomplete information. Mathematical Finance. 29 84-116.
BibTeX
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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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
- Projects
- Stochastic Filtering and Corporate and Sovereign Credit Risk
- 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)