This paper deals with the problem of hedging a defaultable claim. The behaviour of the price is modelled as a pure jump process. To study the hedging problem the procedure performed consists in maximizing the mean value of an exponential utility function. This is a stochastic control problem and the approach followed is related to dynamic programming. The value function is characterized as the largest solution to a suitable BSDE, (Backward Stochastic Differential Equation). Uniqueness is reached under some more assumptions. Given a representation of the price process, a recursive simulation of the value function is provided.
Hedging of a Defaultable Claim: Simulation of the Value Function
TARDELLI, PAOLA
2012-01-01
Abstract
This paper deals with the problem of hedging a defaultable claim. The behaviour of the price is modelled as a pure jump process. To study the hedging problem the procedure performed consists in maximizing the mean value of an exponential utility function. This is a stochastic control problem and the approach followed is related to dynamic programming. The value function is characterized as the largest solution to a suitable BSDE, (Backward Stochastic Differential Equation). Uniqueness is reached under some more assumptions. Given a representation of the price process, a recursive simulation of the value function is provided.File in questo prodotto:
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