Risk-neutral valuation under differential funding costs, defaults and collateralization

Damiano Brigo; Cristin Buescu; Marco Francischello; Andrea Pallavicini; Marek Rutkowski

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arXiv · 1802.10228

Risk-neutral valuation under differential funding costs, defaults and collateralization

Damiano Brigo·Cristin Buescu·Marco Francischello·Andrea Pallavicini·Marek Rutkowski

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Abstract

We develop a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication approach to a generality that has not yet been studied previously and reaching valuation when replication is not assumed. This unifying theoretical framework clarifies the relationship between the two valuation approaches: the adjusted cash flows approach pioneered for example by Brigo, Pallavicini and co-authors ([12, 13, 34]) and the classic replication approach illustrated for example by Bielecki and Rutkowski and co-authors ([3, 8]). In particular, results of this work cover most previous papers where the authors studied specific replication models.

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Damiano Brigo, Cristin Buescu, Marco Francischello, Andrea Pallavicini, Marek Rutkowski. 2018-02-28. Risk-neutral valuation under differential funding costs, defaults and collateralization. https://arxiv.org/abs/1802.10228

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