Quotation Frey, Rüdiger, Prosdocimi, Cecilia, Runggaldier, Wolfgang. 2007. Affine credit risk models under incomplete information. In: Stochastic Processes and applications to mathematical finance, Hrsg. Jiro Akahori, Shigeyoshi Ogawa & Shinzo Watanabe, 97-113. Japan: World Scientific.




We consider the problem of computing some basic quantities such as defaultable bond prices and survival probabilities in a credit risk model according to the intensity based approach. We let the default intensities depend on an external factor process that we assume is not observable. We use stochastic filtering to successively update its distribution on the basis of the observed default history. On one hand this allows us to capture aspects of default contagion (information-induced contagion). On the other hand it allows us to evaluate the above quantities also in our incomplete information context. We consider in particular affine credit risk models and show that in such models the nonlinear filter can be computed via a recursive procedure. This then leads to an explicit expression for the filter that depends on a finite number of sufficient statistics of the observed interarrival times for the defaults provided one chooses an initial distribution for the factor process that is of the Gamma type.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Chapter in edited volume
Language English
Title Affine credit risk models under incomplete information
Title of whole publication Stochastic Processes and applications to mathematical finance
Editor Jiro Akahori, Shigeyoshi Ogawa & Shinzo Watanabe
Page from 97
Page to 113
Location Japan
Publisher World Scientific
Year 2007
URL http://www.dmd.unifi.it/upload/sub/persone/prosdocimi/frey_prosdocimi_runggaldier.pdf


Frey, Rüdiger (Details)
Prosdocimi, Cecilia
Runggaldier, Wolfgang
Institute for Statistics and Mathematics IN (Details)
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