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Review of Derivatives Research
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10-06-2020

Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes

Authors: Gechun Liang, Xingchun Wang

Published in: Review of Derivatives Research | Issue 1/2021

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Abstract

This paper proposes a hybrid credit risk model, in closed form, to price vulnerable options with stochastic volatility. The distinctive features of the model are threefold. First, both the underlying and the option issuer’s assets follow the Heston–Nandi GARCH model with their conditional variance being readily estimated and implemented solely on the basis of the observable prices in the market. Second, the model incorporates both idiosyncratic and systematic risks into the asset dynamics of the underlying and the option issuer, as well as the intensity process. Finally, the explicit pricing formula of vulnerable options enables us to undertake the comparative statistics analysis.
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Metadata
Title
Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes
Authors
Gechun Liang
Xingchun Wang
Publication date
10-06-2020
Publisher
Springer US
Published in
Review of Derivatives Research / Issue 1/2021
Print ISSN: 1380-6645
Electronic ISSN: 1573-7144
DOI
https://doi.org/10.1007/s11147-020-09167-z

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