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

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Date
2007
Dewey
Economie financière
Sujet
Bessel bridge; Insider trading; Equilibrium; Reduced-form models; Structural models; Default
JEL code
G12; D82
Journal issue
Finance and Stochastics
Volume
11
Number
4
Publication date
10-2007
Article pages
591-602
Publisher
Springer
DOI
http://dx.doi.org/10.1007/s00780-007-0038-4
URI
https://basepub.dauphine.fr/handle/123456789/4436
Collections
  • CEREMADE : Publications
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Author
Campi, Luciano
Cetin, Umut
Type
Article accepté pour publication ou publié
Abstract (EN)
We study, in the framework of Back [Rev. Financial Stud. 5(3), 387–409 (1992)], an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm. 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 the market’s view as in reduced-form credit risk models. However, we show that, in 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.

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