2010/12/03 by Xin Guo, Robert A Jarrow, Robert A. Jarrow +4 · 1 citation
Business, Management and Accounting · Economics, Econometrics and Finance · Mathematics · #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Economics and business #FOS: Mathematics #Financial Distress and Bankruptcy Prediction #Probability (math.PR) #Risk Management (q-fin.RM) #math.PR #q-fin.RM
paper · pdf · doi:10.48550/arxiv.1012.0843
openalex publication_date 2010/12/03 · arxiv created 2011/01/19 · arxiv updated 2015/03/17 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper develops a structural credit risk model to characterize the difference between the economic and recorded default times for a firm. Recorded default occurs when default is recorded in the legal system. The economic default time is the last time when the firm is able to pay off its debt prior to the legal default time. It has been empirically documented that these two times are distinct (see Guo, Jarrow, and Lin (2008)). In our model, the probability distribution for the time span between economic and recorded defaults follows a mixture of Arcsine Laws, which is consistent with the results contained in Guo, Jarrow, and Lin. In addition, we show that the classical structural model is a limiting case of our model as the time period between debt repayment dates goes to zero. As a corollary, we show how the firm value process's parameters can be estimated using the tail index and correlation structure of the firm's return.