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Structural credit risk model driven by Lévy process under knight uncertainty

Author

Listed:
  • Zhenyu Tang

    (Jiangxi University of science and technology)

  • Bin Zhong

    (Jiangxi University of science and technology)

  • Liang Zhou

    (Nanchang Qingyun District Dunsi Vocational Training School Co., LTD)

  • Chuanhe Shen

    (Nanchang Qingyun District Dunsi Vocational Training School Co., LTD
    Shandong Youth University of Political Science)

Abstract

As per the projections of conventional credit risk structured model, the risky asset values tend to adhere to the geometric Brownian motion. On the contrary, the risky asset values remain a non-continuous and dynamic ones and jump based on the conditions. Is not possible to measure the real Knight Uncertainty risks in financial markets with the help of a single probability measure. In this background, the current research work analyzes a structural credit risk model that belongs to Levy market under Knight Uncertainty. With the help of Lévy-Laplace exponent, the authors developed a dynamic pricing model in this study and acquired the price intervals for default probability, stock value and the bond value of enterprise. To be specific, the study intended to establish explicit solutions for three value processes, discussed earlier, with an assumption that the jump process follows a log-normal distribution. At the end, the study also conducted numerical analysis to understand the crucial role played by Knight Uncertainty upon the pricing of default probability and the stock value of the enterprise.

Suggested Citation

  • Zhenyu Tang & Bin Zhong & Liang Zhou & Chuanhe Shen, 2023. "Structural credit risk model driven by Lévy process under knight uncertainty," Annals of Operations Research, Springer, vol. 326(1), pages 281-294, July.
    • Handle: RePEc:spr:annopr:v:326:y:2023:i:1:d:10.1007_s10479-023-05309-2
    DOI: 10.1007/s10479-023-05309-2
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    References listed on IDEAS

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