Pricing vulnerable options in a hybrid credit risk model driven by Heston-Nandi GARCH processes
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Publication:2036854
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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Cites work
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Cited in
(11)- Pricing vulnerable options with jump risk and liquidity risk
- Pricing of vulnerable options under hybrid stochastic and local volatility
- Valuing fade-in options with default risk in Heston-Nandi GARCH models
- Pricing collateralised options in the presence of counterparty credit risk: an extension of the Heston-Nandi model
- A closed form solution for vulnerable options with Heston's stochastic volatility
- Pricing of vulnerable power exchange option under the hybrid model
- Valuation of vulnerable options with stochastic corporate liabilities in a mixed fractional Brownian motion environment
- Pricing vulnerable extremum options in a Markov regime-switching Heston's model and stochastic interest rate
- Pricing foreign equity options under a regime-switching model with liquidity risk and default risk
- Valuing vulnerable Asian options with liquidity risk under Lévy processes
- Pricing vulnerable options under a Markov modulated jump-diffusion model with stochastic volatility and stochastic jump intensity
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