Credit risk with incomplete information

This paper extends the hybrid credit risk model proposed by [3] to an totally incomplete information case by assuming a stochastic default barrier which is unobservable. Although the model employed here is based on a first passage time model, information reduction on the firm´s asset value as well as the default barrier remedies shortcomings that exist in the traditional one, and thus provides a more realistic setup. Furthermore, as it is a combination of structural and reduced-form models, it is possible to apply methodology of both approaches. Our goal is to derive the bankruptcy intensity in an explicit form.