Valuation of default-sensitive claims under imperfect information (Q928501)

The authors propose a model of financial market with noisy information, where the market continuously observes a process correlated with the unobserved indicator of the credit quality. One may think of the indicator process as the asset's value and of the observation process as the equity market price or an estimation of the firm's value using available market and accounting information. The author's goal is po price general credit-related claims and they propose a construction making the so-called (H)-hypothesis valid. Such model encompasses a large class of continuous diffusions representing the fundamental process triggering default. It is proved that the default time is totally inaccessible stopping time in the market's filtration. The explicit formulas for the conditional default probabilities and the intensity process are given and they proved to be non-Markovian. The pricing formulas for default-sensitive claims are provided and are illustrated by some examples of the shapes of credit spreads.