Local Risk Minimization for Defaultable Markets
21 Pages Posted: 21 Oct 2009
Date Written: 2008-02
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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