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Progressive Enlargement of Filtrations and Backward Stochastic Differential Equations with Jumps

Author

Listed:
  • Idris Kharroubi

    (Université Paris Dauphine)

  • Thomas Lim

    (Université d’Evry and ENSIIE)

Abstract

This work deals with backward stochastic differential equations (BSDEs for short) with random marked jumps, and their applications to default risk. We show that these BSDEs are linked with Brownian BSDEs through the decomposition of processes with respect to the progressive enlargement of filtrations. We prove that the equations have solutions if the associated Brownian BSDEs have solutions. We also provide a uniqueness theorem for BSDEs with jumps by giving a comparison theorem based on the comparison for Brownian BSDEs. We give in particular some results for quadratic BSDEs. As applications, we study the pricing and the hedging of a European option in a market with a single jump, and the utility maximization problem in an incomplete market with a finite number of jumps.

Suggested Citation

  • Idris Kharroubi & Thomas Lim, 2014. "Progressive Enlargement of Filtrations and Backward Stochastic Differential Equations with Jumps," Journal of Theoretical Probability, Springer, vol. 27(3), pages 683-724, September.
    • Handle: RePEc:spr:jotpro:v:27:y:2014:i:3:d:10.1007_s10959-012-0428-1
    DOI: 10.1007/s10959-012-0428-1
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    References listed on IDEAS

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    1. Ying Jiao & Huyên Pham, 2011. "Optimal investment with counterparty risk: a default-density model approach," Finance and Stochastics, Springer, vol. 15(4), pages 725-753, December.
    2. Morlais, Marie-Amelie, 2010. "A new existence result for quadratic BSDEs with jumps with application to the utility maximization problem," Stochastic Processes and their Applications, Elsevier, vol. 120(10), pages 1966-1995, September.
    3. Robert A. Jarrow & Fan Yu, 2008. "Counterparty Risk and the Pricing of Defaultable Securities," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515, World Scientific Publishing Co. Pte. Ltd..
    4. Stefan Ankirchner & Christophette Blanchet-Scalliet & Anne Eyraud-Loisel, 2010. "CREDIT RISK PREMIA AND QUADRATIC BSDEs WITH A SINGLE JUMP," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(07), pages 1103-1129.
    5. Jeanblanc, Monique & Le Cam, Yann, 2009. "Progressive enlargement of filtrations with initial times," Stochastic Processes and their Applications, Elsevier, vol. 119(8), pages 2523-2543, August.
    6. Pham, Huyên, 2010. "Stochastic control under progressive enlargement of filtrations and applications to multiple defaults risk management," Stochastic Processes and their Applications, Elsevier, vol. 120(9), pages 1795-1820, August.
    7. Stefan Ankirchner & Christophette Blanchet-Scalliet & Anne Eyraud-Loisel, 2009. "Credit risk premia and quadratic BSDEs with a single jump," Papers 0907.1221, arXiv.org, revised Jun 2010.
    8. Ying Hu & Peter Imkeller & Matthias Muller, 2005. "Utility maximization in incomplete markets," Papers math/0508448, arXiv.org.
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