LOCAL RISK MINIMIZATION FOR DEFAULTABLE MARKETS |
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| Authors: | Francesca Biagini Alessandra Cretarola |
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| Institution: | Department of Mathematics, LMU, Munich;
Dipartimento di Scienze Economiche e Aziendali, LUISS Guido Carli, Rome |
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| Abstract: | We study the local risk minimization approach for defaultable markets in a general setting where the asset price dynamics and the default time may influence each other. We find the Föllmer-Schweizer decomposition in this general setting and compute it explicitly in two particular cases, when default time depends on the risky asset's behavior and when only a dependence of discounted asset price on default time is occurring. |
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| Keywords: | defaultable markets local risk minimization minimal martingale measure pseudo-locally risk-minimizing strategy |
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