Application of nonlinear filtering to credit risk

Borkar, Vivek S. ; Ghosh, Mrinal K. ; Rangarajan, G. (2010) Application of nonlinear filtering to credit risk Operations Research Letters, 38 (6). pp. 527-532. ISSN 0167-6377

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Merton's model views equity as a call option on the asset of the firm. Thus the asset is partially observed through the equity. Then using nonlinear filtering an explicit expression for likelihood ratio for underlying parameters in terms of the nonlinear filter is obtained. As the evolution of the filter itself depends on the parameters in question, this does not permit direct maximum likelihood estimation, but does pave the way for the 'Expectation-Maximization' method for estimating parameters.

Item Type:Article
Source:Copyright of this article belongs to Elsevier Science.
Keywords:Merton's Model; Asset; Equity; Nonlinear Filter; EM Algorithm
ID Code:73299
Deposited On:02 Dec 2011 09:58
Last Modified:10 Jul 2012 06:01

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