Filtering and Incomplete Information in Credit Risk

Rüdiger Frey, T Schmidt

Publication: Chapter in book/Conference proceedingChapter in edited volume

Abstract

This chapter studies structural and reduced-form credit risk models under incomplete information using techniques from stochastic filtering. We start with a brief introduction
to stochastic filtering. Next we cover the pricing of corporate securities (debt and equity)
in structural models under partial information. Furthermore we study the construction of a dynamic reduced-form credit risk model via the innovations approach to nonlinear filtering, and we discuss pricing, calibration and hedging in that context. The paper
closes with a number of numerical case studies related to model calibration and the
pricing of credit index options.
Original languageEnglish
Title of host publicationRecent Advancements in the Theory and Practice of Credit Derivatives
Editors D. Brigo, T. Bielecki, F. Patras
Place of PublicationNew Jersey
PublisherWiley
Publication statusPublished - 1 May 2011

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