Filtering and Incomplete Information in Credit Risk
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...