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Review of Derivatives Research

Erschienen in:

10.06.2020

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

verfasst von: Gechun Liang, Xingchun Wang

Erschienen in: Review of Derivatives Research | Ausgabe 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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Resource: BIS, OTC derivatives statistics, https://www.bis.org/statistics/derstats.htm.

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For convenience, we use the more parsimonious notation f(t) to indicate \( f(t;\phi _1,\phi _2,\phi _3,\phi _4)\), and similarly for \(A_i(t)\) and \(B_i(t)\).

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Titel: Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes
verfasst von: Gechun Liang
Xingchun Wang
Publikationsdatum: 10.06.2020
Verlag: Springer US
Erschienen in: Review of Derivatives Research / Ausgabe 1/2021
Print ISSN: 1380-6645
Elektronische ISSN: 1573-7144
DOI: https://doi.org/10.1007/s11147-020-09167-z