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HAZARD PROCESSES AND MARTINGALE HAZARD PROCESSES
Author(s) -
Coculescu Delia,
Nikeghbali Ashkan
Publication year - 2012
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.2010.00471.x
Subject(s) - martingale (probability theory) , hazard , mathematical economics , mathematics , simple (philosophy) , lévy process , stochastic process , economics , econometrics , statistics , philosophy , chemistry , organic chemistry , epistemology
In this paper, we build a bridge between different reduced‐form approaches to pricing defaultable claims. In particular, we show how the well‐known formulas by Duffie, Schroder, and Skiadas and by Elliott, Jeanblanc, and Yor are related. Moreover, in the spirit of Collin Dufresne, Hugonnier, and Goldstein, we propose a simple pricing formula under an equivalent change of measure. Two processes will play a central role: the hazard process and the martingale hazard process attached to a default time. The crucial step is to understand the difference between them, which has been an open question in the literature so far. We show that pseudo‐stopping times appear as the most general class of random times for which these two processes are equal. We also show that these two processes always differ when τ is an honest time, providing an explicit expression for the difference. Eventually we provide a solution to another open problem: we show that if τ is an arbitrary random (default) time such that its Azéma's supermartingale is continuous, then τ avoids stopping times.