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Default Ambiguity

Author

Listed:
  • Tolulope Fadina

    (Department of Mathematical Stochastics, University of Freiburg, Ernst-Zermelo Str.1, 79104 Freiburg im Breisgau, Germany)

  • Thorsten Schmidt

    (Department of Mathematical Stochastics, University of Freiburg, Ernst-Zermelo Str.1, 79104 Freiburg im Breisgau, Germany
    Freiburg Research Institute of Advanced Studies (FRIAS), 79104 Freiburg im Breisgau, Germany
    University of Strasbourg Institute for Advanced Study (USIAS), 67081 Strasbourg, France)

Abstract

This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit-risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath–Jarrow–Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.

Suggested Citation

  • Tolulope Fadina & Thorsten Schmidt, 2019. "Default Ambiguity," Risks, MDPI, vol. 7(2), pages 1-17, June.
    • Handle: RePEc:gam:jrisks:v:7:y:2019:i:2:p:64-:d:238522
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    References listed on IDEAS

    as
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    2. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
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