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Arbitrage pricing of defaultable game options with applications to convertible bonds

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Author Info

  • Tomasz Bielecki
  • Stephane Crepey
  • Monique Jeanblanc
  • Marek Rutkowski
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    Abstract

    This paper is the first in a series that we devote to studying the problems of valuation and hedging of defaultable game options in general, and convertible corporate bonds in particular. Here, we present mathematical foundations for our overall study. Specifically, we provide several results characterizing the arbitrage price of a defaultable game option in terms of relevant Dynkin games. In addition, we provide important results regarding price decomposition of defaultable options. These general results are then specified to the case of convertible bonds, yielding in particular a decomposition of convertible bonds in an optional and a bond component.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680701401083
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 8 (2008)
    Issue (Month): 8 ()
    Pages: 795-810

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    Handle: RePEc:taf:quantf:v:8:y:2008:i:8:p:795-810

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    Web page: http://www.tandfonline.com/RQUF20

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    Related research

    Keywords: Defaultable game options; Convertible securities; Convertible bonds; Semimartingale market;

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    Cited by:
    1. Ivan Guo & Marek Rutkowski, 2014. "Arbitrage Pricing of Multi-person Game Contingent Claims," Papers 1405.2718, arXiv.org.
    2. Rida Laraki & Eilon Solan, 2012. "Equilibrium in Two-Player Nonzero-Sum Dynkin Games in Continuous Time," Working Papers hal-00753508, HAL.
    3. Egami, Masahiko & Leung, Tim & Yamazaki, Kazutoshi, 2013. "Default swap games driven by spectrally negative Lévy processes," Stochastic Processes and their Applications, Elsevier, vol. 123(2), pages 347-384.
    4. Agostino Capponi & Jose Figueroa-Lopez & Jeffrey Nisen, 2011. "Pricing and Semimartingale Representations of Vulnerable Contingent Claims in Regime-Switching Markets," Papers 1110.0403, arXiv.org, revised Feb 2012.
    5. Yuri Kifer, 2012. "Dynkin Games and Israeli Options," Papers 1209.1791, arXiv.org.

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