Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling

Campi, Luciano and Çetin, Umut ORCID: 0000-0001-8905-853X (2007) Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling. Finance and Stochastics, 11 (4). pp. 591-602. ISSN 0949-2984

Preview

PDF Download (277kB) | Preview

Abstract

We study an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm in the framework of Back [2]. The market consists of a risk- neutral informed agent, noise traders and a market maker who sets the price using the total order. When the insider does not trade, the default time possesses a default intensity in market's view as in reduced-form credit risk models. However, we show that, in the equilibrium, the modelling becomes structural in the sense that the default time becomes the first time that some continuous observation process falls below a certain barrier. Interestingly, the firm value is still not observable. We also establish the no expected trade theorem that the insider's trades are inconspicuous.

Item Type:	Article
Official URL:	http://www.springer.com/math/quantitative+finance/...
Additional Information:	© 2007 Springer
Divisions:	Statistics
Subjects:	Q Science > QA Mathematics
Date Deposited:	13 May 2008 10:54
Last Modified:	05 Nov 2024 17:03
URI:	http://eprints.lse.ac.uk/id/eprint/4821

Actions (login required)

View Item