Unexpected Default in an Information Based Model

TL;DR

This paper establishes conditions under which the default time in an information-based model is totally inaccessible and explicitly computes its compensator using a Brownian bridge framework.

Contribution

It introduces explicit conditions for default times to be totally inaccessible and derives their compensators within an information-based modeling framework.

Findings

Default time can be modeled as a totally inaccessible stopping time.

Explicit computation of the compensator for default times is achieved.

The model uses a Brownian bridge to represent market information flow.

Abstract

This paper provides sufficient conditions for the time of bankruptcy (of a company or a state) for being a totally inaccessible stopping time and provides the explicit computation of its compensator in a framework where the flow of market information on the default is modelled explicitly with a Brownian bridge between 0 and 0 on a random time interval.