On correlated defaults and incomplete information
File(s)
Accepted version
Author(s)
Ching, Waiki
Gu, Jiawen
Zheng, Harry
Type
Journal Article
Abstract
In this paper, we study a continuous time structural asset value model for two correlatedfirms using a two-dimensional Brownian motion. We consider the situation of incompleteinformation, where the information set available to the market participants includes the defaulttime of each firm and the periodic asset value reports. In this situation, the default timeof each firm becomes a totally inaccessible stopping time to the market participants. Theoriginal structural model is first transformed to a reduced-form model. Then the conditionaldistribution of the default time together with the asset value of each name are derived. Weprove the existence of the intensity processes of default times and also give the explicit formof the intensity processes. Numerical studies on the intensities of the two correlated names areconducted for some special cases.
Date Issued
2021-03-01
Date Acceptance
2019-09-05
Citation
Journal of Industrial and Management Optimization, 2021, 17 (2), pp.889-908
ISSN
1547-5816
Publisher
American Institute of Mathematical Sciences
Start Page
889
End Page
908
Journal / Book Title
Journal of Industrial and Management Optimization
Volume
17
Issue
2
Copyright Statement
© 2021 American Institute of Mathematical Sciences.
Subjects
Science & Technology
Technology
Physical Sciences
Engineering, Multidisciplinary
Operations Research & Management Science
Mathematics, Interdisciplinary Applications
Engineering
Mathematics
Correlated defaults
Brownian motions
incomplete information
intensity models
MODELS
0102 Applied Mathematics
0103 Numerical and Computational Mathematics
0801 Artificial Intelligence and Image Processing
Operations Research
Publication Status
Published