Local Risk-Minimization for Defaultable Claims with Recovery Process

Journal Article · Fri Jun 15 00:00:00 EDT 2012 · Applied Mathematics and Optimization

DOI:https://doi.org/10.1007/S00245-011-9155-8· OSTI ID:22043764

Biagini, Francesca ^[1]; Cretarola, Alessandra ^[2]

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1. LMU, Department of Mathematics (Germany)
2. Universita degli Studi di Perugia, Dipartimento di Matematica e Informatica (Italy)

We study the local risk-minimization approach for defaultable claims with random recovery at default time, seen as payment streams on the random interval [0,{tau} Logical-And T], where T denotes the fixed time-horizon. We find the pseudo-locally risk-minimizing strategy in the case when the agent information takes into account the possibility of a default event (local risk-minimization with G-strategies) and we provide an application in the case of a corporate bond. We also discuss the problem of finding a pseudo-locally risk-minimizing strategy if we suppose the agent obtains her information only by observing the non-defaultable assets.

• OSTI ID: 22043764
• Journal Information: Applied Mathematics and Optimization, Vol. 65, Issue 3; Other Information: Copyright (c) 2012 Springer Science+Business Media, LLC; Country of input: International Atomic Energy Agency (IAEA); ISSN 0095-4616
• Country of Publication: United States
• Language: English

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