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Application of nonlinear filtering to credit risk

Borkar, Vivek S and Ghosh, Mrinal K and Rangarajan, Govindan (2010) Application of nonlinear filtering to credit risk. In: Operations Research Letters, 38 (6). pp. 527-532.

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Official URL: http://dx.doi.org/10.1016/j.orl.2010.08.013

Abstract

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. (C) 2010 Elsevier B.V. All rights reserved.

Item Type: Journal Article
Additional Information: Copyright of this article belongs to Elsevier Science.
Keywords: Merton's model; Asset; Equity; Nonlinear filter; EM algorithm
Department/Centre: Division of Physical & Mathematical Sciences > Mathematics
Date Deposited: 21 Dec 2010 08:36
Last Modified: 21 Dec 2010 08:36
URI: http://eprints.iisc.ernet.in/id/eprint/34553

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