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Pricing and Trading Credit Default Swaps in a Hazard Process Model

by Tomasz Bielecki of the Illinois Institute of Technology,
Monique Jeanblanc of Évry University, and
Marek Rutkowski of the University of New South Wales & Warsaw University of Technology

January 2008

Abstract: In the paper we study dynamics of the arbitrage prices of credit default swaps within a hazard process model of credit risk. We derive these dynamics without postulating that the immersion property is satisfied between some relevant filtrations. These results are then applied so to study the problem of replication of general defaultable claims, including some basket claims, by means of dynamic trading of credit default swaps.

AMS Classification: 60G35, 60G44, 60H30.

Keywords: Credit default swaps, defaultable claims, first-to-default claims, hedging, immersion of filtrations, Hypothesis H.

Published in: Annals of Applied Probability, Vol. 18, No. 6, (December 2008), pp. 2495-2529.

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