An Infinite Factor Model for Credit Risk
by Thorsten Schmidt of the University of Leipzig
Abstract: The defaultable term structure is modeled using stochastic differential equations in Hilbert spaces. This leads to an infinite dimensional model, which is free of arbitrage under a certain drift condition. Furthermore, the model is extended to incorporate ratings based on a Markov chain.
Published in: International Journal of Theoretical and Applied Finance, Vol. 9, No. 1, (February 2006), pp. 43-68.Download paper (250K PDF) 27 pages