Pricing and hedging of credit derivatives via nonlinear filtering’, preprint, Universität Leipzig, submitted

Abstract In this paper 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