Intensity process and compensator: A new filtration expansion approach and the Jeulin-Yor theorem

DOI10.1214/07-AAP447MaRDI QIDQ2476401zbMATH OpenOpenAlexFDO

Publication date 19 March 2008

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0801.3191

compensator filtration expansion intensity process Jeulin-Yor theorem

Point processes (e.g., Poisson, Cox, Hawkes processes) (60G55) Applications of stochastic analysis (to PDEs, etc.) (60H30) Markov processes (60J99)

Abstract: Let

(X_{t})_{t g e 0}

be a continuous-time, time-homogeneous strong Markov process with possible jumps and let

a u

be its first hitting time of a Borel subset of the state space. Suppose

X

is sampled at random times and suppose also that

X

has not hit the Borel set by time

t

. What is the intensity process of

a u

based on this information? This question from credit risk encompasses basic mathematical problems concerning the existence of an intensity process and filtration expansions, as well as some conceptual issues for credit risk. By revisiting and extending the famous Jeulin--Yor [Lecture Notes in Math. 649 (1978) 78--97] result regarding compensators under a general filtration expansion framework, a novel computation methodology for the intensity process of a stopping time is proposed. En route, an analogous characterization result for martingales of Jacod and Skorohod [Lecture Notes in Math. 1583 (1994) 21--35] under local jumping filtration is derived.

Review text

Let \((\Omega,{\mathfrak I},P)\) be a probability space, \(\mathbb{F}= ({\mathfrak I}_t)_{t\geq 0}\) any filtration and \(\tau\) an arbitrary nonnegative random variable. Let \(\mathbb{G}= (G_t)_{t\geq 0}\) be any filtration expansion of \(\mathbb{F}\). An increasing measurable process \((A_t)_{t\geq 0}\), such that \(A_0= 0\), \(\mathbf{1}_{\{\tau\leq t\}}- A_t\) is a \(\mathbb{G}\)-martingale and \(A\) is \(\mathbb{G}\)-predictable is called \(\mathbb{G}\)-compensator of \(\tau\). The intensity process \((\lambda_t)_{t\geq 0}\) of \(\tau\) is defined as the Radon-Nikodým derivative \(({dA_t\over dt})_{t\geq 0}\), provided that \(A\) is a.s. absolutely continuous with respect to the Lebesgue measure. In the present paper the authors study the problem of existence and computation of intensity process of \(\tau\). This problem is motivated by problem from credit risk, when \((X_t)_{t\geq 0}\) be a continuous-time time-homogeneous strong Markov process and \(\tau\) is its first hitting time of a Borel subset of the state space. The authors give some examples to use the obtained results.

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