Finance and Stochastics

, Volume 17, Issue 3, pp 565–585

Equilibrium model with default and dynamic insider information

Article

DOI: 10.1007/s00780-012-0196-x

Cite this article as:
Campi, L., Çetin, U. & Danilova, A. Finance Stoch (2013) 17: 565. doi:10.1007/s00780-012-0196-x

Abstract

We consider an equilibrium model à la Kyle–Back for a defaultable claim issued by a given firm. In such a market the insider observes continuously in time the value of the firm, which is unobservable by the market makers. Using the construction in Campi et al. (http://hal.archives-ouvertes.fr/hal-00534273/en/, 2011) of a dynamic three-dimensional Bessel bridge, we provide the equilibrium price and the insider’s optimal strategy. As in Campi and Çetin (Finance Stoch. 11:591–602, 2007), the information released by the insider while trading optimally makes the default time predictable in the market’s view at the equilibrium. We conclude the paper by comparing the insider’s expected profits in the static and dynamic private information case. We also compute explicitly the value of the insider’s information in the special cases of a defaultable stock and a bond.

Keywords

Default time Defaultable claim Equilibrium Dynamic information Insider trading Dynamic Bessel bridge 

Mathematics Subject Classification (2010)

60G44 60H05 60H10 93E11 

JEL Classification

D82 G14 

Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.LAGAUniversity Paris 13VilletaneuseFrance
  2. 2.Department of StatisticsLondon School of EconomicsLondonUK

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