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PRICING OF DEFAULT-SENSITIVE CONTINGENT CLAIMS FOR REGULAR INVESTORS
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Abstract [en]

We consider a defaultable market with a savings account, a risky asset S, and default-sensitive contingent claims which are claims with pay-offs that depend on a default time of the company issuing the stock S. The default time is modelled as a stopping time with respect to the filltration generated by the value of the firm, which is not directly observable by a regular investor, who observes only the stock and the default when it happens. However, the stock price and the value of the firm are correlated and thus observations of the stock price maybe used to infer the information about the default time. We study the pricing problem of a default-sensitive contingent claim for the regular investor and show that the defaultable market is incomplete from his or her perspective, and hence one must deal with the problem of choosing a martingale measure. We approach this task with the so-called f-divergence approach.

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URN: urn:nbn:se:uu:diva-287360OAI: oai:DiVA.org:uu-287360DiVA: diva2:922638
Available from: 2016-04-24 Created: 2016-04-24 Last updated: 2016-04-24

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