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Default times, no-arbitrage conditions and changes of probability measures

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Abstract

In this paper, we give a financial justification, based on no-arbitrage conditions, of the (H)-hypothesis in default time modeling. We also show how the (H)-hypothesis is affected by an equivalent change of probability measure. The main technique used here is the theory of progressive enlargements of filtrations.

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Acknowledgements

The authors would like to thank an associate editor for a very careful reading and for many suggestions which helped to improve the paper. We also wish to thank two anonymous referees for very helpful comments.

D. Coculescu was supported by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) and by Credit Suisse. M. Jeanblanc benefited from the support of the “Chaire Risque de Crédit”, Fédération Bancaire Française.

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Authors and Affiliations

  1. Institut für Mathematik, Universität Zürich, Winterthurerstrasse 190, 8057, Zürich, Switzerland

    Delia Coculescu & Ashkan Nikeghbali

  2. Département de Mathématiques, Université d’Evry Val d’Essonne and Institut Europlace de Finance, 23, Boulevard de France, 91037, Evry Cedex, France

    Monique Jeanblanc

  3. Swiss Banking Institute, Universität Zürich, Plattenstrasse 32, 8032, Zürich, Switzerland

    Ashkan Nikeghbali

Authors
  1. Delia Coculescu
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  2. Monique Jeanblanc
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  3. Ashkan Nikeghbali
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Correspondence to Delia Coculescu.

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Coculescu, D., Jeanblanc, M. & Nikeghbali, A. Default times, no-arbitrage conditions and changes of probability measures. Finance Stoch 16, 513–535 (2012). https://doi.org/10.1007/s00780-011-0170-z

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  • DOI: https://doi.org/10.1007/s00780-011-0170-z

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