Hedging of Credit Derivatives in Models with Totally Unexpected Default

Tomasz R. Bielecki, Monique Jeanblanc and Marek Rutkowski
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Tomasz R. Bielecki: Department of Applied Mathematics, Illinois Institute of Technology, Chicago, IL 60616, USA
Monique Jeanblanc: Département de Mathématiques, Université d'Évry Val d'Essonne, 91025 Évry Cedex, France
Marek Rutkowski: School of Mathematics, University of New South Wales, Sydney, NSW 2052, Australia and Faculty of Mathematics and Information Science, Warsaw University of Technology, 00-661 Warszawa, Poland

Chapter 2 in Stochastic Processes and Applications to Mathematical Finance, 2006, pp 35-100 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe paper analyzes alternative mathematical techniques, which can be used to derive hedging strategies for credit derivatives in models with totally unexpected default. The stochastic calculus approach is used to establish abstract characterization results for hedgeable contingent claims in a fairly general set-up. In the Markovian framework, we use the PDE approach to show that the arbitrage price and the hedging strategy for an attainable contingent claim can be described in terms of solutions of a pair of coupled PDEs.

Keywords: Stochastic Processes; Mathematical Finance; Malliavin Calculus; Martingale Representation; Chaos Expansion; Levy Processes; Stable Processes; Stochastic Differential Equations; Stochastic Control (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (8)

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