Information reduction via level crossings in a credit risk models (Q2463710)

This paper adds the type of information reduction in a structural credit risk model, alternative to previous works. It is assumed that the firm makes public announcements about firm's asset value only when there are significant changes in its economic standing. The techniques used is a generalization of the existing tools known for Azéma's martingale. Using this newly developed mathematics, the characterization of firm's default time and the pricing of firm's risky debt is studied. Analytic expressions for a firm's conditional default probability and risky zero-coupon bond prices are provided. For special cases of the general model, these expressions are easily computed.