A BSDE approach to fair bilateral pricing under endogenous collateralization (Q331356)
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English | A BSDE approach to fair bilateral pricing under endogenous collateralization |
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A BSDE approach to fair bilateral pricing under endogenous collateralization (English)
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27 October 2016
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This paper deals with an extension of the Bergman model to the case of an endogenous collateral and with a market model with idiosyncratic costs for the risky assets. It is examined an extended Bergman model for nonnegative and general initial endowments of counterparties, when the collateral is based on the hedger's unilateral valuation of the contract. For the case of nonnegative endowments it is shown that the model is arbitrage-free for an arbitrary specification of the collateral. The authors derive backward stochastic differential equations satisfied by unilateral prices and show that the pricing and hedging problems for both counterparties have unique solutions. It is shown that the range of fair bilateral prices is nonempty. For the case of general initial endowments, the no-arbitrage property, the existence and uniqueness of unilateral prices, and the non-emptiness of the range of fair bilateral prices are established. The case where the collateral is negotiated by the counterparties is studied. Using the backward stochastic viability property, the range of fair bilateral prices for European contingent claims under the assumption of nonnegative endowments is identified. For a market model with idiosyncratic funding costs for risky assets the authors study the case of the hedger's and negotiated collateral and establish similar results as for Bergman's model. It is studied a model with idiosyncratic funding costs for risky assets under the convention of a negotiated collateral. A version of the comparison theorem for two-dimensional backward stochastic differential equations, based on the backward stochastic viability property, is presented.
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bilateral pricing
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endogenous collateralization
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arbitrage-free conditions
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backward stochastic viability property
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idiosyncratic funding costs
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comparison theorem
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