the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search


Submit Your Paper

In Rememberance: World Trade Center (WTC)

doi> search: A or B

Export citation to:
- Text (plain)
- BibTeX

Dynamics of Corporate Security Prices in Firm Value Models with Incomplete Information

by Rüdiger Frey of WU Vienna & University of Leipzig, and
Dan Lu of UBS Zurich

May 8, 2012

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. Using the Dellacherie-formula the problem is transformed to a standard filtering problem for a stopped di usion 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 briefly explain how the model can be applied to the pricing of bond and equity options.

Keywords: Structural credit risk models, incomplete information, nonlinear filtering.

Books Referenced in this paper:  (what is this?)

Download paper (463K PDF) 22 pages

Most Cited Books within Credit Pricing Papers