Risk premia and optimal liquidation of credit derivatives
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Publication:4909145
DOI10.1142/S0219024912500598zbMATH Open1260.91249arXiv1110.0220MaRDI QIDQ4909145FDOQ4909145
Publication date: 12 March 2013
Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)
Abstract: This paper studies the optimal timing to liquidate credit derivatives in a general intensity-based credit risk model under stochastic interest rate. We incorporate the potential price discrepancy between the market and investors, which is characterized by risk-neutral valuation under different default risk premia specifications. We quantify the value of optimally timing to sell through the concept of delayed liquidation premium, and analyze the associated probabilistic representation and variational inequality. We illustrate the optimal liquidation policy for both single-named and multi-named credit derivatives. Our model is extended to study the sequential buying and selling problem with and without short-sale constraint.
Full work available at URL: https://arxiv.org/abs/1110.0220
Recommendations
Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40) Interest rates, asset pricing, etc. (stochastic models) (91G30)
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Cited In (12)
- Liquidity tail risk and credit default swap spreads
- Speculative futures trading under mean reversion
- FINANCING AND INVESTMENT STRATEGIES UNDER CREDITOR-MAXIMIZED LIQUIDATION
- Title not available (Why is that?)
- Managing the risk of loan prepayments and the optimal structure of short term lending rates
- OPTIMAL MEAN REVERSION TRADING WITH TRANSACTION COSTS AND STOP-LOSS EXIT
- Pricing derivatives with counterparty risk and collateralization: a fixed point approach
- Optimal timing to purchase options
- OPTIMAL LIQUIDATION OF DERIVATIVE PORTFOLIOS
- Optimal multiple trading times under the exponential OU model with transaction costs
- Accounting for risk aversion in derivatives purchase timing
- Heterogeneous Premiums for Homogeneous Risks? Asset Liability Management under Default Probability and Price-Demand Functions
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