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Credit Risk with asymmetric information on the default threshold

Author

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  • Caroline Hillairet

    (CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique)

  • Ying Jiao

    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique)

Abstract

We study the impact of asymmetric information in a general credit model where the default is triggered when a fundamental diff usion process of the firm passes below a random threshold. Inspired by some recent technical default events during the fi nancial crisis, we consider the role of the firm's managers who choose the level of the default threshold and have complete information. However, other investors on the market only have partial observations either on the process or on the threshold. We specify the accessible information for di fferent types of investors. Besides the framework of progressive enlargement of fi ltrations usually adopted in the credit risk modelling, we also combine the results on initial enlargement of filtrations to deal with the uncertainty on the default threshold. We consider several types of investors who have di fferent information levels and we compute the default probabilities in each case. Numerical illustrations show that the insiders who have extra information on the default threshold obtain better estimations of the default probability compared to the standard market investors.

Suggested Citation

  • Caroline Hillairet & Ying Jiao, 2012. "Credit Risk with asymmetric information on the default threshold," Post-Print hal-00663136, HAL.
    • Handle: RePEc:hal:journl:hal-00663136
    DOI: 10.1080/17442508.2011.575944
    Note: View the original document on HAL open archive server: https://hal.science/hal-00663136
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    References listed on IDEAS

    as
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    10. Caroline Hillairet & Ying Jiao, 2010. "Information Asymmetry in Pricing of Credit Derivatives," Working Papers hal-00457456, HAL.
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    Cited by:

    1. Caroline Hillairet & Ying Jiao, 2015. "Portfolio optimization with insider’s initial information and counterparty risk," Finance and Stochastics, Springer, vol. 19(1), pages 109-134, January.
    2. Jia-wen Zhang & Long-hui Chen & Xiang-yun Liu & Fen Ding, 2014. "Measurement of Credit Risk of Small and Medium-sized S&T Enterprises in China," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 5(4), pages 21-31, July.
    3. Francesca Biagini & Andrea Mazzon & Ari-Pekka Perkkiö, 2023. "Optional projection under equivalent local martingale measures," Finance and Stochastics, Springer, vol. 27(2), pages 435-465, April.
    4. Imke Redeker & Ralf Wunderlich, 2019. "Credit risk with asymmetric information and a switching default threshold," Papers 1910.14413, arXiv.org, revised Nov 2019.

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