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Hazard rate for credit risk and hedging defaultable contingent claims

Author

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  • Christophette Blanchet-Scalliet

    ()

  • Monique Jeanblanc

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Abstract

We provide a concise exposition of theoretical results that appear in modeling default time as a random time, we study in details the invariance martingale property and we establish a representation theorem which leads, in a complete market setting, to the hedging portfolio of a vulnerable claim. Our main result is that, to hedge a defaultable claim one has to invest the value of this contingent claim in the defaultable zero-coupon. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Christophette Blanchet-Scalliet & Monique Jeanblanc, 2004. "Hazard rate for credit risk and hedging defaultable contingent claims," Finance and Stochastics, Springer, vol. 8(1), pages 145-159, January.
  • Handle: RePEc:spr:finsto:v:8:y:2004:i:1:p:145-159
    DOI: 10.1007/s00780-003-0108-1
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    File URL: http://hdl.handle.net/10.1007/s00780-003-0108-1
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    Citations

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    Cited by:

    1. Ruediger Frey & Lars Roesler & Dan Lu, 2017. "Corporate Security Prices in Structural Credit Risk Models with Incomplete Information: Extended Version," Papers 1701.04780, arXiv.org, revised May 2017.
    2. repec:eee:apmaco:v:291:y:2016:i:c:p:279-291 is not listed on IDEAS
    3. Fr'ed'eric Vrins, 2016. "Wrong-Way Risk Models: A Comparison of Analytical Exposures," Papers 1605.05100, arXiv.org.
    4. Christophette Blanchet-Scalliet & Anne Eyraud-Loisel & Manuela Royer-Carenzi, 2010. "Hedging of Defaultable Contingent Claims using BSDE with uncertain time horizon," Post-Print hal-00341431, HAL.
    5. Anne Eyraud-Loisel, 2013. "Quadratic hedging in an incomplete market derived by an influent informed investor," Post-Print hal-00450949, HAL.
    6. Tahir Choulli & Catherine Daveloose & Mich`ele Vanmaele, 2015. "A martingale representation and risk's decomposition with applications: Mortality/longevity risk and securitization," Papers 1510.05858, arXiv.org, revised Jun 2017.
    7. Tomoaki Shouda, 2005. "Dynamical analysis of corporate bonds based on the yield spread term-quality surface," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 12(4), pages 307-332, December.
    8. repec:eee:ejores:v:264:y:2018:i:3:p:1144-1158 is not listed on IDEAS
    9. Kamil Kladivko & Mihail Zervos, 2017. "Valuation of Employee Stock Options (ESOs) by means of Mean-Variance Hedging," Papers 1710.00897, arXiv.org.
    10. 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.
    11. Jeanblanc, Monique & Song, Shiqi, 2015. "Martingale representation property in progressively enlarged filtrations," Stochastic Processes and their Applications, Elsevier, vol. 125(11), pages 4242-4271.
    12. Qiao, Gaoxiu & Yao, Qiang, 2015. "Weak convergence of equity derivatives pricing with default risk," Statistics & Probability Letters, Elsevier, vol. 103(C), pages 46-56.
    13. Christophette Blanchet-Scalliet & Anne Eyraud-Loisel & Manuela Royer-Carenzi, 2008. "Hedging of Defaultable Contingent Claims using BSDE with uncertain time horizon," Papers 0811.4039, arXiv.org, revised Sep 2009.
    14. Delia Coculescu & Monique Jeanblanc & Ashkan Nikeghbali, 2012. "Default times, no-arbitrage conditions and changes of probability measures," Finance and Stochastics, Springer, vol. 16(3), pages 513-535, July.
    15. Christophette Blanchet-Scalliet & Anne Eyraud-Loisel & Manuela Royer-Carenzi, 2010. "Hedging of Defaultable Contingent Claims using BSDE with uncertain time horizon," Post-Print hal-01107525, HAL.
    16. repec:eee:insuma:v:76:y:2017:i:c:p:149-163 is not listed on IDEAS
    17. Philippe Ehlers & Philipp Schönbucher, 2009. "Background filtrations and canonical loss processes for top-down models of portfolio credit risk," Finance and Stochastics, Springer, vol. 13(1), pages 79-103, January.
    18. Blanchet-Scalliet, Christophette & El Karoui, Nicole & Martellini, Lionel, 2005. "Dynamic asset pricing theory with uncertain time-horizon," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1737-1764, October.
    19. Elhiwi, Majdi, 2014. "Default barrier intensity model for credit risk evaluation," Statistics & Probability Letters, Elsevier, vol. 95(C), pages 125-131.

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    Keywords

    Default risk; representation theorem; hedging;

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