Credit Risk Model with Lagged Information

Abstract

In this paper, I propose a structural credit risk model with lagged information on a firm. Under the simple assumption that information on a firm's asset value is observed with a time lag, I show the model also has the properties of a reduced form model with a default intensity process. In contrast to some previous studies in which both periodic and noisy accounting report assumptions are necessary to derive the same result, I argue that lagged information is sufficient to generate a default intensity process. This difference in the assumptions has fundamentally different implications for the time-series of credit spreads; under both the noisy accounting and lag information assumptions, the model-implied credit spreads exhibit periodic patterns whereas under my model assumptions they do not.