On absolutely continuous compensators and nonlinear filtering equations in default risk models

DOI10.1016/J.SPA.2012.07.001MaRDI QIDQ454855zbMATH OpenOpenAlexFDO

Authors Umut Cetin

Publication date 10 October 2012

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1205.1154

zbMATH Keywords

Doob-Meyer decompositionZakai equationnonlinear filteringabsolutely continuous compensatorsdefault risk modelsKushner-Stratonovich equationsvaluation of credit derivativesAzéma supermartingale

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Signal detection and filtering (aspects of stochastic processes) (60G35) Stochastic integrals (60H05) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: We discuss the pricing of defaultable assets in an incomplete information model where the default time is given by a first hitting time of an unobservable process. We show that in a fairly general Markov setting, the indicator function of the default has an absolutely continuous compensator. Given this compensator we then discuss the optional projection of a class of semimartingales onto the filtration generated by the observation process and the default indicator process. Available formulas for the pricing of defaultable assets are analyzed in this setting and some alternative formulas are suggested.

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Cited in

(6)

• Conditional hitting time estimation in a nonlinear filtering model by the Brownian bridge method
• On the compensator of the default process in an information-based model
• scientific article; zbMATH DE number 1396448 (Why is no real title available?)
• Characteristics and constructions of default times
• Corporate security prices in structural credit risk models with incomplete information
• Bilateral credit valuation adjustment for large credit derivatives portfolios

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