Journal of Risk

Risk.net

Sequential defaults and incomplete information

Kay Giesecke, Lisa R. Goldberg

ABSTRACT

We propose a multi-firm first-passage credit model in which investors have incomplete information. In this model, investors observe neither a firm’s value nor its default barrier. The model takes into account the short-term risk inherent in default events, the market-wide impact of defaults on security prices due to counterparty relations among firms, and the cyclical default dependence effects observed in credit markets. We explicitly calculate the pricing trend and the arrival intensity of the kth-to-default. These results furnish (1) tractable reducedform formulae for arrival probabilities of sequential dependent defaults and prices of multi-name credit derivatives, and (2) an algorithm for the simulation of sequential unpredictable default times.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here