Local Risk-Minimization for Defaultable Claims with Recovery Process

Biagini, Francesca and Cretarola, Alessandra (2012): Local Risk-Minimization for Defaultable Claims with Recovery Process. In: Applied Mathematics & Optimization, Vol. 65, No. 3: pp. 293-314

Abstract

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,τ∧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.

• Item Type: Journal article
• Faculties: Mathematics, Computer Science and Statistics > Mathematics > Workgroup Financial Mathematics
• Subjects: 500 Science > 510 Mathematics
• ISSN: 0095-4616
• Language: English