From the decompositions of a stopping time to risk premium decompositions

DOI10.1051/PROC/201756001zbMATH Open1407.91283arXiv0912.4312OpenAlexW1506403397MaRDI QIDQ4606382FDOQ4606382

Delia Coculescu

Publication date: 7 March 2018

Published in: ESAIM: Proceedings and Surveys (Search for Journal in Brave)

Abstract: We build a general model for pricing defaultable claims. In addition to the usual absence of arbitrage assumption, we assume that one defaultable asset (at least) looses value when the default occurs. We prove that under this assumption, in some standard market filtrations, default times are totally inaccessible stopping times; we therefore proceed to a systematic construction of default times with particular emphasis on totally inaccessible stopping times. Surprisingly, this abstract mathematical construction, reveals a very specific and useful way in which default models can be built, using both market factors and idiosyncratic factors. We then provide all the relevant characteristics of a default time (i.e. the Az'ema supermartingale and its Doob-Meyer decomposition) given the information about these factors. We also provide explicit formulas for the prices of defaultable claims and analyze the risk premiums that form in the market in anticipation of losses which occur at the default event. The usual reduced-form framework is extended in order to include possible economic shocks, in particular jumps of the recovery process at the default time. This formulas are not classic and we point out that the knowledge of the default compensator or the intensity process is not anymore a sufficient quantity for finding explicit prices, but we need indeed the Az'ema supermartingale and its Doob-Meyer decomposition.

Full work available at URL: https://arxiv.org/abs/0912.4312

Recommendations

• On a fundamental identity for stopping times and its application to risk theory
• Randomized stopping times and coherent multiperiod risk measures
• ON OPTIMAL STOPPING OF A DISCRETE TIME RISK PROCESS
• Risk Averse Asymptotics and the Optional Decomposition
• Upper and lower bounds for stop-loss premiums in a discrete time risk process
• Decomposing risk in an exploitation-exploration problem with endogenous termination time
• Time-consistent decisions and temporal decomposition of coherent risk functionals
• On dependence of risks and stop-loss premiums

zbMATH Keywords

Doob-Meyer decompositionstopping timeAzéma supermartingalerisk premium decompositions

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Generalizations of martingales (60G48) Stopping times; optimal stopping problems; gambling theory (60G40)

Cites Work

• A general version of the fundamental theorem of asset pricing
• Hazard rate for credit risk and hedging defaultable contingent claims
• On models of default risk.
• Semi-martingales et grossissement d'une filtration
• Title not available (Why is that?)
• Grossissements de filtrations: exemples et applications. Séminaire de Calcul Stochastique 1982/83, Université Paris VI
• Default times, no-arbitrage conditions and changes of probability measures
• Title not available (Why is that?)
• Title not available (Why is that?)
• An essay on the general theory of stochastic processes
• Term Structures of Credit Spreads with Incomplete Accounting Information
• Title not available (Why is that?)
• Changes of filtrations and of probability measures
• HAZARD PROCESSES AND MARTINGALE HAZARD PROCESSES
• Quelques applications de la théorie générale des processus. I
• Title not available (Why is that?)
• Modeling credit risk with partial information.
• Information reduction via level crossings in a credit risk models
• PRICING CORPORATE SECURITIES UNDER NOISY ASSET INFORMATION
• Valuation of default-sensitive claims under imperfect information
• On an Optional Semimartingale Decomposition and the Existence of a Deflator in an Enlarged Filtration
• Credit Risk Models with Incomplete Information
• Temps d'arret stricts et martingales de sauts
• DYNAMIC DEFAULTABLE TERM STRUCTURE MODELING BEYOND THE INTENSITY PARADIGM
• Title not available (Why is that?)
• Title not available (Why is that?)

Cited In (5)

• Selfdecomposability perpetuity laws and stopping times
• HAZARD PROCESSES AND MARTINGALE HAZARD PROCESSES
• Statistical causality, optional and predictable projections
• Thin times and random times' decomposition
• A default system with overspilling contagion

This page was built for publication: From the decompositions of a stopping time to risk premium decompositions

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4606382)