Intensity Process for a Pure Jump Lévy Structural Model with Incomplete Information

2014/05/15 by Xin Dong, Dong, Xin, Harry Zheng +1
Economics, Econometrics and Finance · #60G55 #60J75 #91G40 #FOS: Economics and business #Mathematical Finance (q-fin.MF) #msc:60G55 #msc:60J75 #msc:91G40 #q-fin.MF

paper · pdf · doi:10.48550/arxiv.1405.3767

15 pages, 2 figures

arxiv created 2014/05/15 · arxiv updated 2014/05/16

Abstract

In this paper we discuss a credit risk model with a pure jump Lévy process for the asset value and an unobservable random barrier. The default time is the first time when the asset value falls below the barrier. Using the indistinguishability of the intensity process and the likelihood process, we prove the existence of the intensity process of the default time and find its explicit representation in terms of the distance between the asset value and its running minimal value. We apply the result to find the instantaneous credit spread process and illustrate it with a numerical example.

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