Risk Premia and Optimal Liquidation of Credit Derivatives
AbstractThis paper studies the optimal timing to liquidate credit derivatives in a general intensity-based credit risk model under stochastic interest rate. We incorporate the potential price discrepancy between the market and investors, which is characterized by risk-neutral valuation under different default risk premia specifications. We quantify the value of optimally timing to sell through the concept of delayed liquidation premium, and analyze the associated probabilistic representation and variational inequality. We illustrate the optimal liquidation policy for both single-named and multi-named credit derivatives. Our model is extended to study the sequential buying and selling problem with and without short-sale constraint.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1110.0220.
Date of creation: Oct 2011
Date of revision: Oct 2012
Publication status: Published in International Journal of Theoretical and Applied Finance 2012
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Web page: http://arxiv.org/
Other versions of this item:
- Tim Leung & Peng Liu, 2012. "Risk Premia And Optimal Liquidation Of Credit Derivatives," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 15(08), pages 1250059-1-1.
- NEP-ALL-2011-10-15 (All new papers)
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