Credit Risk under incomplete accounting information: A discrete time model and itsasymptotic behaviour

Abstract

Relying on the paper of Due and Lando "Term structures of credit spreads with incomplete accounting information", based on information asymmetry in credit risk, we propose a discretized approach. We model the logarithm Z of the firm asset value process V as a Markov chain. The debtholders do not have perfect information on the actual value of the firm; they receive only a discrete noisy stream of reports Y . We study the pair {Z, Y }. Then, letting the increments go to zero, we compute the intensity of the default time. We compare our result with the result of Duffie and Lando (2001) in the Brownian case