CREDIT RISK AND INCOMPLETE INFORMATION: FILTERING AND EM PARAMETER ESTIMATION

Claudio Fontana () and Wolfgang J. Runggaldier ()
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Claudio Fontana: Department of Pure and Applied Mathematics, University of Padova, Via Trieste, 63, I-35121 Padova, Italy
Wolfgang J. Runggaldier: Department of Pure and Applied Mathematics, University of Padova, Via Trieste, 63, I-35121 Padova, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 05, 683-715

Abstract: We consider a reduced-form credit risk model where default intensities and interest rate are functions of a not fully observable Markovian factor process, thereby introducing an information-driven default contagion effect among defaults of different issuers. We determine arbitrage-free prices of OTC products coherently with information from the financial market, in particular yields and credit spreads and this can be accomplished via a filtering approach coupled with an EM-algorithm for parameter estimation.

Keywords: Default risk; contagion; factor models; partial information; EM algorithm; extended Kalman filter (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024910005966

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