ROLE OF INFORMATION IN PRICING DEFAULT-SENSITIVE CONTINGENT CLAIMS

We consider a financial market with a savings account and a stock S that follows a general diffusion. The default of the company, which issues the stock S, is modeled as a stopping time with respect to the filtration generated by the value of the firm that is not observable by regular investors. We assume that the stock price and the value of the firm are correlated. We study three investors with different information levels trading in the market who aim to price a general default-sensitive contingent claim. We use the density approach and Yor's method to solve the pricing problem. Specifically, we find the sets of equivalent martingale measures in three cases and, when needed, we choose one of them using f-divergence approach.