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Hedging of defaultable claims in a structural model using a locally risk-minimizing approach

Okhrati, R; Balbás, A; Garrido, J; (2014) Hedging of defaultable claims in a structural model using a locally risk-minimizing approach. Stochastic Processes and their Applications , 124 (9) pp. 2868-2891. 10.1016/j.spa.2014.04.001. Green open access

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Abstract

In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Föllmer–Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Lévy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral.

Type: Article
Title: Hedging of defaultable claims in a structural model using a locally risk-minimizing approach
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.spa.2014.04.001
Publisher version: https://doi.org/10.1016/j.spa.2014.04.001
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Defaultable claims, Hedging strategy, Locally risk-minimizing, Föllmer–Schweizer decomposition, Galtchouk–Kunita–Watanabe decomposition
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Civil, Environ and Geomatic Eng
URI: https://discovery.ucl.ac.uk/id/eprint/10081498
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