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Open AccessArticle

Default Ambiguity

1
Department of Mathematical Stochastics, University of Freiburg, Ernst-Zermelo Str.1, 79104 Freiburg im Breisgau, Germany
2
Freiburg Research Institute of Advanced Studies (FRIAS), 79104 Freiburg im Breisgau, Germany
3
University of Strasbourg Institute for Advanced Study (USIAS), 67081 Strasbourg, France
*
Author to whom correspondence should be addressed.
Risks 2019, 7(2), 64; https://doi.org/10.3390/risks7020064
Received: 29 March 2019 / Revised: 17 May 2019 / Accepted: 17 May 2019 / Published: 10 June 2019
(This article belongs to the Special Issue Advances in Credit Risk Modeling and Management)
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. View Full-Text
Keywords: model ambiguity; default time; credit risk; no-arbitrage; reduced-form HJM models; recovery process model ambiguity; default time; credit risk; no-arbitrage; reduced-form HJM models; recovery process
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Fadina, T.; Schmidt, T. Default Ambiguity. Risks 2019, 7, 64.

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