Event risk, contingent claims and the temporal resolution of uncertainty

• Published in: Mathematics and financial economics Vol. 8; no. 1; pp. 29 - 69
• Main Authors: Collin-Dufresne, Pierre, Hugonnier, Julien
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 2014; Springer Nature B.V
• Subjects: Applications of Mathematics; Arbitrage; Costs; Credit risk; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Expected utility; Finance; Hedging; Insurance; Macroeconomics/Monetary Economics//Financial Economics; Management; Mathematical analysis; Mathematics; Mathematics and Statistics; Mortgage backed securities; Prepayments; Prices; Quantitative Finance; Risk; Statistics for Business; Studies; Uncertainty; Utility functions; 60H30; Utility based valuation; G11; G10; Certainty equivalent; G13; 90A09; Credit risk; Temporal resolution of uncertainty; Event risk; 93E20; 90A10; Incomplete markets; D81

We study the pricing and hedging of contingent claims that are subject to Event Risk which we define as rare and unpredictable events whose occurrence may be correlated to, but cannot be hedged perfectly with standard marketed instruments. The super-replication costs of such event sensitive continge...