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Role Of Information In Pricing Default-Sensitive Contingent Claims

Author

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  • MONIQUE JEANBLANC

    (Département de Mathématiques, Université d'Evry Val d'Essonne, rue Jarlan, F-91025 Evry Cedex, France)

  • MARTA LENIEC

    (Department of Mathematics, Uppsala University, Box 480, 75106 Uppsala, Sweden)

Abstract

We consider a financial market with a savings account and a stock S that follows a general diffusion. The default of the company, which issues the stock S, is modeled as a stopping time with respect to the filtration generated by the value of the firm that is not observable by regular investors. We assume that the stock price and the value of the firm are correlated. We study three investors with different information levels trading in the market who aim to price a general default-sensitive contingent claim. We use the density approach and Yor's method to solve the pricing problem. Specifically, we find the sets of equivalent martingale measures in three cases and, when needed, we choose one of them using f-divergence approach.

Suggested Citation

  • Monique Jeanblanc & Marta Leniec, 2015. "Role Of Information In Pricing Default-Sensitive Contingent Claims," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 1-25.
    • Handle: RePEc:wsi:ijtafx:v:18:y:2015:i:01:n:s0219024915500077
    DOI: 10.1142/S0219024915500077
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    References listed on IDEAS

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    1. Axel Grorud & Monique Pontier, 1998. "Insider Trading in a Continuous Time Market Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 331-347.
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    3. Bogdan Iftimie & Monique Jeanblanc & Thomas Lim & Hai-Nam Nguyen, 2013. "Optimization problem under change of regime of interest rate," Papers 1305.7309, arXiv.org.
    4. Sara Biagini & Marco Frittelli, 2005. "Utility maximization in incomplete markets for unbounded processes," Finance and Stochastics, Springer, vol. 9(4), pages 493-517, October.
    5. El Karoui, Nicole & Jeanblanc, Monique & Jiao, Ying, 2010. "What happens after a default: The conditional density approach," Stochastic Processes and their Applications, Elsevier, vol. 120(7), pages 1011-1032, July.
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    Cited by:

    1. Oliver Janke, 2016. "Utility Maximization and Indifference Value under Risk and Information Constraints for a Market with a Change Point," Papers 1610.08644, arXiv.org.

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