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Filtering and Incomplete Information in Credit Risk

by Rüdiger Frey of the University of Leipzig, and
Thorsten Schmidt of Chemnitz University of Technology

January 22, 2010

Abstract: This paper studies structural and reduced-form credit risk models under incomplete information. Applying stochastic filtering techniques we tackle the aspect of incomplete information in different settings: starting with a brief introduction to stochastic filtering we thereafter cover the pricing of corporate securities (debt and equity) in structural models under partial information. Furthermore the construction of a dynamic reduced-form credit risk model via the innovations approach is discussed; as well as pricing, calibration and hedging in that model.

Keywords: Credit risk, credit derivatives, filtering, incomplete information, structural models, intensity based models.

This paper is Published as Ch. 7 in...

Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity

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