Benchmark approach for defaultable claims under partial information. (1st January 2013)

• Record Type: Journal Article
• Authors: Venkat Appal Raju, I.; Selvaraju, N.
• Is Part Of: International journal of financial engineering and risk management. Volume 1:Number 2(2013)
• Page Start: 170
• Page End: 192
• Publication Date: 2013-01-01
• Subjects: credit risk -- credit derivatives -- reduced form models -- benchmark approach -- locally risk-minimising -- cash flow; Financial engineering -- Periodicals; Finance -- Mathematical models -- Periodicals; 332
• Languages: English
• ISSNs: 2049-0909

Abstract

We study the pricing and hedging of defaultable claims under the benchmark approach, introduced by Platen and Heath (2006), with partial information. The model is considered to be driven by an Ornstein–Uhlenbeck (OU) process. We fist convert the partial information model to a complete information model through the innovation process approach by deriving the non-linear filtering equation for the unobservable processes. We then define the total cash flow and use the Schweizer (2008) methodology for hedging the cash flow under the real world probability measure.