Local Risk-Minimization for Defaultable Claims with Recovery Process

Local Risk-Minimization for Defaultable Claims with Recovery Process We study the local risk-minimization approach for defaultable claims with random recovery at default time , seen as payment streams on the random interval 〚0, τ ∧ T 〛, where T denotes the fixed time-horizon. We find the pseudo-locally risk-minimizing strategy in the case when the agent information takes into account the possibility of a default event (local risk-minimization with G -strategies) and we provide an application in the case of a corporate bond. We also discuss the problem of finding a pseudo-locally risk-minimizing strategy if we suppose the agent obtains her information only by observing the non-defaultable assets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematics and Optimization Springer Journals

Local Risk-Minimization for Defaultable Claims with Recovery Process

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Publisher
Springer-Verlag
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC
Subject
Mathematics; Numerical and Computational Physics; Systems Theory, Control; Calculus of Variations and Optimal Control; Optimization; Mathematical Methods in Physics; Theoretical, Mathematical and Computational Physics
ISSN
0095-4616
eISSN
1432-0606
D.O.I.
10.1007/s00245-011-9155-8
Publisher site
See Article on Publisher Site

Abstract

We study the local risk-minimization approach for defaultable claims with random recovery at default time , seen as payment streams on the random interval 〚0, τ ∧ T 〛, where T denotes the fixed time-horizon. We find the pseudo-locally risk-minimizing strategy in the case when the agent information takes into account the possibility of a default event (local risk-minimization with G -strategies) and we provide an application in the case of a corporate bond. We also discuss the problem of finding a pseudo-locally risk-minimizing strategy if we suppose the agent obtains her information only by observing the non-defaultable assets.

Journal

Applied Mathematics and OptimizationSpringer Journals

Published: Jun 1, 2012

References

  • Quadratic hedging methods for defaultable claims
    Biagini, F.; Cretarola, A.
  • Local risk-minimization for defaultable markets
    Biagini, F.; Cretarola, A.

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