From the decompositions of a stopping time to risk premium decompositions

DOI10.1051/PROC/201756001MaRDI QIDQ4606382zbMATH OpenOpenAlexFDO

Authors Delia Coculescu

Publication date 7 March 2018

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

Copyright license Creative Commons Attribution-NonCommercial 4.0 International

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

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)

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.

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Cited in

(6)

• Thin times and random times' decomposition
• A martingale representation theorem and valuation of defaultable securities
• Hazard processes and martingale hazard processes
• A default system with overspilling contagion
• Selfdecomposability perpetuity laws and stopping times
• Statistical causality, optional and predictable projections

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