Default ambiguity

Tolulope Fadina; Thorsten Schmidt

doi:10.3390/risks7020064

Default ambiguity

Research output: Contribution to journal › Article › peer-review

Abstract

This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit-risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath–Jarrow–Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.

Original language	English (US)
Article number	64
Journal	Risks
Volume	7
Issue number	2
DOIs	https://doi.org/10.3390/risks7020064
State	Published - Jun 2019
Externally published	Yes

Keywords

Credit risk
Default time
Model ambiguity
No-arbitrage
Recovery process
Reduced-form HJM models

ASJC Scopus subject areas

Accounting
Economics, Econometrics and Finance (miscellaneous)
Strategy and Management

Online availability

10.3390/risks7020064

Library availability

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title = "Default ambiguity",

abstract = "This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit-risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath–Jarrow–Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.",

keywords = "Credit risk, Default time, Model ambiguity, No-arbitrage, Recovery process, Reduced-form HJM models",

author = "Tolulope Fadina and Thorsten Schmidt",

note = "Funding Information: Funding: Financial support by Carl-Zeiss-Stiftung, and German Research Foundation (DFG) via CRC 1283 is gratefully acknowledged. We also thank the Freiburg Institute of Advanced Studies (FRIAS) for its hospitality and financial support. Funding Information: Financial support by Carl-Zeiss-Stiftung, and German Research Foundation (DFG) via CRC 1283 is gratefully acknowledged. We also thank the Freiburg Institute of Advanced Studies (FRIAS) for its hospitality and financial support. Publisher Copyright: {\textcopyright} 2019 by the authors. Licensee MDPI, Basel, Switzerland.",

year = "2019",

month = jun,

doi = "10.3390/risks7020064",

language = "English (US)",

volume = "7",

journal = "Risks",

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number = "2",

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AU - Fadina, Tolulope

AU - Schmidt, Thorsten

N1 - Funding Information: Funding: Financial support by Carl-Zeiss-Stiftung, and German Research Foundation (DFG) via CRC 1283 is gratefully acknowledged. We also thank the Freiburg Institute of Advanced Studies (FRIAS) for its hospitality and financial support. Funding Information: Financial support by Carl-Zeiss-Stiftung, and German Research Foundation (DFG) via CRC 1283 is gratefully acknowledged. We also thank the Freiburg Institute of Advanced Studies (FRIAS) for its hospitality and financial support. Publisher Copyright: © 2019 by the authors. Licensee MDPI, Basel, Switzerland.

PY - 2019/6

Y1 - 2019/6

N2 - This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit-risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath–Jarrow–Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.

AB - This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit-risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath–Jarrow–Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.

KW - Credit risk

KW - Default time

KW - Model ambiguity

KW - No-arbitrage

KW - Recovery process

KW - Reduced-form HJM models

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ER -

Default ambiguity

Abstract

Keywords

ASJC Scopus subject areas

Online availability

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