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Multiple defaults and contagion risks

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  • Ying Jiao

    (PMA)

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    Abstract

    We study multiple defaults where the global market information is modelled as progressive enlargement of filtrations. We shall provide a general pricing formula by establishing a relationship between the enlarged filtration and the reference default-free filtration in the random measure framework. On each default scenario, the formula can be interpreted as a Radon-Nikodym derivative of random measures. The contagion risks are studied in the multi-defaults setting where we consider the optimal investment problem in a contagion risk model and show that the optimization can be effectuated in a recursive manner with respect to the default-free filtration.

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    File URL: http://arxiv.org/pdf/0912.3132
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    Paper provided by arXiv.org in its series Papers with number 0912.3132.

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    Date of creation: Dec 2009
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    Handle: RePEc:arx:papers:0912.3132

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    1. Kunita, Hiroshi, 1971. "Asymptotic behavior of the nonlinear filtering errors of Markov processes," Journal of Multivariate Analysis, Elsevier, Elsevier, vol. 1(4), pages 365-393, December.
    2. Philippe Ehlers & Philipp J. Schoenbucher, 2006. "Background Filtrations andCanonical Loss Processes for Top-Down Models of Portfolio Credit Risk," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 07-07, Swiss Finance Institute.
    3. R. J. Elliott & M. Jeanblanc & M. Yor, 2000. "On Models of Default Risk," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 10(2), pages 179-195.
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