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

DOI10.1016/J.SPA.2012.07.001zbMATH Open1282.91325arXiv1205.1154OpenAlexW2130875250MaRDI QIDQ454855FDOQ454855

Authors: Umut Cetin 

Publication date: 10 October 2012

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

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.

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

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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)

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Cited In (5)

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• Corporate security prices in structural credit risk models with incomplete information
• On the compensator of the default process in an information-based model
• Bilateral credit valuation adjustment for large credit derivatives portfolios
• Conditional hitting time estimation in a nonlinear filtering model by the Brownian bridge method

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