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Hazard rate for credit risk and hedging defaultable contingent claims

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Abstract.

We provide a concise exposition of theoretical results that appear in modeling default time as a random time, we study in details the invariance martingale property and we establish a representation theorem which leads, in a complete market setting, to the hedging portfolio of a vulnerable claim. Our main result is that, to hedge a defaultable claim one has to invest the value of this contingent claim in the defaultable zero-coupon.

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Authors and Affiliations

  1. C.B. Laboratoire J.A.Dieudonne, Universite de Nice Sophia-Antipolis, Parc Valrose, 06108, Nice Cedex 2, France

    Christophette Blanchet-Scalliet

  2. M.J. Equipe d’analyse et probabilités, Université d’Evry Val d’Essonne, Rue du Pére Jarlan, 91025, Evry Cedex, France

    Monique Jeanblanc

Authors
  1. Christophette Blanchet-Scalliet
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  2. Monique Jeanblanc
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Corresponding author

Correspondence to Christophette Blanchet-Scalliet.

Additional information

Received: April 2003

Mathematics Subject Classification:

91B24, 91B29, 60G46

JEL Classification:

G10

The authors would like to thank D. Becherer and J.N. Hugonnier for interesting discussions and the anonymous referee whose pertinent questions on the first version of this paper help them to clarify the proofs. All remaining errors are ours.

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Blanchet-Scalliet, C., Jeanblanc, M. Hazard rate for credit risk and hedging defaultable contingent claims. Finance and Stochastics 8, 145–159 (2004). https://doi.org/10.1007/s00780-003-0108-1

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  • DOI: https://doi.org/10.1007/s00780-003-0108-1

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