Recursive valuation of defaultable securities and the timing of resolution of uncertainty

Darrell Duffie*, Mark Schroder, Costis Skiadas

*Corresponding author for this work

Research output: Contribution to journalArticle

97 Scopus citations

Abstract

We derive the implications of default risk for valuation of securities in an abstract setting in which the fractional default recovery rate and the hazard rate for default may depend on the market value of the instrument itself, or on the market values of other instruments issued by the same entity (which are determined simultaneously). A key technique is the use of backward recursive stochastic integral equations. We characterize the dependence of the market value on the manner of resolution of uncertainty, and in particular give conditions for monotonicity of value with respect to the information filtration.

Original languageEnglish (US)
Pages (from-to)1075-1090
Number of pages16
JournalAnnals of Applied Probability
Volume6
Issue number4
DOIs
StatePublished - Nov 1996

Keywords

  • Backward stochastic differential equations
  • Credit risk
  • Default
  • Timing of resolution of uncertainty

ASJC Scopus subject areas

  • Statistics and Probability
  • Statistics, Probability and Uncertainty

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