Modeling Credit Risk with Partial Information

By Umut Çetin, Robert A. Jarrow, Philip Protter, Yildiray Yildirim. 2004

177 citations recorded by the source corpus.

This paper provides an alternative approach to Duffie and Lando (2001) for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager's information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager's information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azema martingale, and we use excursion theory of Brownian motions to price risky debt.

View Paper: https://www.semanticscholar.org/paper/8b96f34c88a788a222efa1b7848dc81a5c4aca64

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Citations in the corpus

Local martingales and filtration shrinkage (2011, background): “An attempt to relate reduced form models as simply projections of structural models onto a smaller filtration is outlined in [11], and carried out to some extent in [3] and more generally in [13].”
STRUCTURAL VERSUS REDUCED FORM MODELS: A NEW INFORMATION BASED PERSPECTIVE (2004, methodology): “…section, using this classification scheme, we see that the model of Giesecke and Goldberg (2003) is still a structural model, even though it has a totally inaccessible stopping time, while the models of Duffie and Lando (2001), Kusuoka (1999), and Çetin et al. (2004) are reduced form models.”