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Credit Risk And Incomplete Information: Filtering And Em Parameter Estimation

Author

Listed:
  • 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)

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.

Suggested Citation

  • Claudio Fontana & Wolfgang J. Runggaldier, 2010. "Credit Risk And Incomplete Information: Filtering And Em Parameter Estimation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(05), pages 683-715.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:05:n:s0219024910005966
    DOI: 10.1142/S0219024910005966
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    References listed on IDEAS

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    1. Rüdiger Frey & Cecilia Prosdocimi & Wolfgang J. Runggaldier, 2007. "Affine Credit Risk Models under Incomplete Information," World Scientific Book Chapters, in: Jiro Akahori & Shigeyoshi Ogawa & Shinzo Watanabe (ed.), Stochastic Processes And Applications To Mathematical Finance, chapter 6, pages 97-113, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Herbertsson, Alexander & Frey, Rüdiger, 2016. "Cds Index Options Under Incomplete Information," Working Papers in Economics 685, University of Gothenburg, Department of Economics.
    2. Viviana Fanelli & Claudio Fontana & Francesco Rotondi, 2023. "A hidden Markov model for statistical arbitrage in international crude oil futures markets," Papers 2309.00875, arXiv.org, revised Sep 2024.
    3. Njike Leunga, Charles Guy & Hainaut, Donatien, 2019. "Interbank Credit Risk Modelling with Self-Exciting Jump Processes," LIDAM Discussion Papers ISBA 2019017, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    4. Areski Cousin & Jérôme Lelong & Tom Picard, 2023. "Rating transitions forecasting: a filtering approach," Post-Print hal-03347521, HAL.

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