Credit risk premia and quadratic BSDEs with a single jump

Details Credit risk premia and quadratic BSDEs with a single jump Credit risk premia and quadratic BSDEs with a single jump

2009-07-07

arxiv.org/abs/0907.1221v3

International Journal of Theoretical and Applied Finance (IJTAF) 13, 7 (2010) 1103-1129

Economy

Quantitative Finance

Pricing of Securities

Scientific paper

10.1142/10.1142/S021902491000613

This paper is concerned with the determination of credit risk premia of defaultable contingent claims by means of indifference valuation principles. Assuming exponential utility preferences we derive representations of indifference premia of credit risk in terms of solutions of Backward Stochastic Differential Equations (BSDE). The class of BSDEs needed for that representation allows for quadratic growth generators and jumps at random times. Since the existence and uniqueness theory for this class of BSDEs has not yet been developed to the required generality, the first part of the paper is devoted to fill that gap. By using a simple constructive algorithm, and known results on continuous quadratic BSDEs, we provide sufficient conditions for the existence and uniqueness of quadratic BSDEs with discontinuities at random times.

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