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Probability and Math Finance Seminar

Thorsten Schmidt, Universitat Leipzig

Pricing and hedging of credit derivatives via nonlinear filtering

Abstract

In this work a new, information-based approach for modelling the dynamic evolution of a portfolio of credit risky securities is proposed. In this context market prices of liquidly traded derivatives are given by the solution of a nonlinear filtering problem. This problem is solved via the innovations approach to nonlinear filtering. Moreover, we derive the ensuing asset price dynamics and compute risk-minimizing hedging strategies. In the last part of the paper we discuss a numerical approach - based on particle filtering - to some of the arising filtering problems.

MONDAY, March 31, 2008
Time: 5:00 P.M.
Location: WeH 6423