The fundamental theorem of asset pricing under default and collateral in finite discrete time

Abstract:

We consider a financial market where time and uncertainty are modeled by a finite event-tree. The event-tree has a length of N, a unique initial node at the initial date, and a continuum of branches at each node of the tree. Prices and returns of J assets are modeled, respectively, by a R2 J × R2 J-valued stochastic process { ( qn, Vn + 1 ) }n = 0N - 1. In this framework we prove a version of the Fundamental Theorem of Asset Pricing which applies to defaultable securities backed by exogenous collateral suffering a contingent linear depreciation. © 2005 Elsevier Inc. All rights reserved.

Año de publicación:

2006

Keywords:

• Arbitrage opportunity
• Incomplete markets
• Exogenous collateral
• Continuum of states

Fuente:

scopus