Credit risk models with incomplete information

Credit risk models with incomplete information

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Article ID: iaor200968817
Country: United States
Volume: 34
Issue: 2
Start Page Number: 320
End Page Number: 332
Publication Date: May 2009
Journal: Mathematics of Operations Research
Authors: , ,
Keywords: risk, information
Abstract:

Incomplete information is at the heart of information-based credit risk models. In this paper, we rigorously define incomplete information with the notion of “delayed filtrations.” We characterize two distinct types of delayed information, continuous and discrete: the first generated by a time change of filtrations and the second by finitely many marked point processes. This notion unifies the noisy information in Duffie and Lando (2001) and the notion of partial information in Collin-Dufresne et al. (2003), under which structural models are translated into reduced-form intensity-based models. We illustrate through a simple example the importance of this notion of delayed information, as well as the potential pitfall for abusing the Laplacian approximation techniques for calculating the intensity process in an information-based model.

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