
 CollinDufresne, Pierre, Robert S. Goldstein, and Julien Hugonnier, "A General Formula for Valuing Defaultable Securities", Econometrica, Vol. 72, No. 5, (September 2004), pp. 13771407. Abstract: Previous research has shown that under a suitable nojump condition, the price of a defaultable security is equal to its riskneutral expected discounted cash flows if a modified discount rate is introduced to account for the possibility of default. Below, we generalize this result by demonstrating that one can always value defaultable claims using expected riskadjusted discounting provided that the expectation is taken under a slightly modified probability measure. This new probability measure puts zero probability on paths where default occurs prior to the maturity, and is thus only absolutely continuous with respect to the riskneutral probability measure. After establishing the general result and discussing its relation with the existing literature, we investigate several examples for which the nojump condition fails. Each example illustrates the power of our general formula by providing simple analytic solutions for the prices of defaultable securities. Books Referenced in this paper: (what is this?) 