Filtering and Incomplete Information in Credit Risk

Abstract

This chapter 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 reducedform credit risk model via the innovations approach is discussed; as well as pricing, calibration and hedging in that model.