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An application to credit risk of a hybrid Monte Carlo-Optimal quantization method

TitleAn application to credit risk of a hybrid Monte Carlo-Optimal quantization method
Publication TypeJournal Article
Year of Publication2009
AuthorsGiorgia Callegaro, and Abass Sagna
Keywordscomputational finance, credit risk, Filtering, Monte-Carlo method, optimal quantization, partial information, probability, quantitative finance, risk management, structural approach, survival probabilities
Abstract

In this paper we use a hybrid Monte Carlo-Optimal quantization method to approximate the conditional survival probabilities of a firm, given a structural model for its credit defaul, under partial information. We consider the case when the firm's value is a non-observable stochastic process $ (V_t)_{t \geq 0} $ and inverstors in the market have access to a process $ (S_t)_{t \geq 0} $, whose value at each time $ t $ is related to $ (V_s, s \leq t) $. We are interested in the computation of the conditional survival probabilities of the firm given the "investor information". As a application, we analyse the shape of the credit spread curve for zero coupon bonds in two examples.