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Credit Risk Modeling with Gaussian Random Fields

by Thorsten Schmidt of the University of Leipzig

April 3, 2004

Abstract: The defaultable term structure is modeled using Gaussian random fields. The proposed models are shown to be free of arbitrage under certain drift conditions. We derive explicit pricing formulas for several credit derivatives. This leads to two calibration procedures, where the second one adjusts for scarcity of credit derivatives data. Also, we present a hedging example.

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