Information Asymmetry in Pricing of Credit Derivatives

TL;DR

This paper investigates how asymmetric information affects the pricing of credit derivatives, focusing on different information structures and their impact on valuation under risk-neutral measures.

Contribution

It introduces a framework using enlargement of filtrations to model various information asymmetries in credit derivative pricing.

Findings

Different information structures significantly influence derivative valuation.

Explicit risk-neutral probabilities are derived for each information scenario.

The approach provides a systematic way to evaluate default-sensitive claims under asymmetric info.

Abstract

We study the pricing of credit derivatives with asymmetric information. The managers have complete information on the value process of the firm and on the default threshold, while the investors on the market have only partial observations, especially about the default threshold. Different information structures are distinguished using the framework of enlargement of filtrations. We specify risk neutral probabilities and we evaluate default sensitive contingent claims in these cases.