Corporate Security Prices in Structural Credit Risk Models with Incomplete Information

Frey, Rüdiger and Rösler, Lars and Lu, Dan (2017) Corporate Security Prices in Structural Credit Risk Models with Incomplete Information. Mathematical Finance, 29 (1). pp. 84-116. ISSN 1467-9965

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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.

Item Type: Article
Additional Information: This article allows free accesss.
Keywords: derivative asset analysis for corporate securities, incomplete information, stochastic filtering, structural credit risk models
Divisions: Departments > Finance, Accounting and Statistics > Statistics and Mathematics
Version of the Document: Published
Depositing User: Katrin Artner
Date Deposited: 24 Jan 2019 09:03
Last Modified: 24 Jan 2019 17:58
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/75557/
URI: https://epub.wu.ac.at/id/eprint/4871

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