Parameter Estimation in Credit Models Under Incomplete Information

30 Pages Posted: 13 Jan 2014

See all articles by Alexander Herbertsson

Alexander Herbertsson

University of Gothenburg - Department of Economics/Centre for Finance

Rüdiger Frey

ETH Zürich

Date Written: July 28, 2013

Abstract

We consider the filtering model of Frey & Schmidt (2012) stated under the real probability measure and develop a method for estimating the parameters in this framework by using time-series data of CDS index spreads and classical maximum-likelihood algorithms. The estimation-approach incorporates the Kushner-Stratonovich SDE for the dynamics of the filtering probabilities. The convenient formula for the survival probability is a prerequisite for our estimation algorithm. We apply the developed maximum-likelihood algorithms on market data for historical CDS index spreads (iTraxx Europe Main Series) in order to estimate the parameters in the nonlinear filtering model for an exchangeable credit portfolio. Several such estimations are performed as well as accompanying statistical and numerical computations.

Keywords: Credit risk, intensity-based models, filtering, estimation, Markov process

JEL Classification: G13, G33, C02, C13, C63

Suggested Citation

Herbertsson, Alexander and Frey, Rüdiger, Parameter Estimation in Credit Models Under Incomplete Information (July 28, 2013). Available at SSRN: https://ssrn.com/abstract=2378456 or http://dx.doi.org/10.2139/ssrn.2378456

Alexander Herbertsson (Contact Author)

University of Gothenburg - Department of Economics/Centre for Finance ( email )

Box 640
Vasagatan 1, E-building, floor 5 & 6
Göteborg, 40530
Sweden

Rüdiger Frey

ETH Zürich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland
0041 1 63 26526 (Phone)
0041 1 63 21085 (Fax)

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