Credit Risk with asymmetric information on the default threshold

Caroline Hillairet (1) , Ying Jiao (2)

1 CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique
2 LPMA - Laboratoire de Probabilités et Modèles Aléatoires

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.

Mots clés: credit risk; insider; enlargement of filtration

Domaines: Finance quantitative [q-fin.CP]; Probabilités [math.PR]

Caroline Hillairet, Ying Jiao. Credit Risk with asymmetric information on the default threshold. Stochastics: An International Journal of Probability and Stochastic Processes, 2012, 84 (2-3), pp.183-198. ⟨10.1080/17442508.2011.575944⟩. ⟨hal-00663136⟩