Hedging of defaultable claims in a structural model using a locally risk-minimizing approach

Ramin Okhrati, Alejandro Balbás and José Garrido

Stochastic Processes and their Applications, 2014, vol. 124, issue 9, 2868-2891

Abstract: In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Föllmer–Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Lévy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral.

Keywords: Defaultable claims; Hedging strategy; Locally risk-minimizing; Föllmer–Schweizer decomposition; Galtchouk–Kunita–Watanabe decomposition (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.spa.2014.04.001

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