A unified approach to pricing and risk management of equity and credit risk

DOI10.1016/J.CAM.2013.04.047zbMATH Open1314.91227arXiv1212.5395OpenAlexW3125499397MaRDI QIDQ2349596FDOQ2349596

Authors: Claudio Fontana, J. M. Montes 

Publication date: 17 June 2015

Published in: Journal of Computational and Applied Mathematics (Search for Journal in Brave)

Abstract: We propose a unified framework for equity and credit risk modeling, where the default time is a doubly stochastic random time with intensity driven by an underlying affine factor process. This approach allows for flexible interactions between the defaultable stock price, its stochastic volatility and the default intensity, while maintaining full analytical tractability. We characterise all risk-neutral measures which preserve the affine structure of the model and show that risk management as well as pricing problems can be dealt with efficiently by shifting to suitable survival measures. As an example, we consider a jump-to-default extension of the Heston stochastic volatility model.

Full work available at URL: https://arxiv.org/abs/1212.5395

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zbMATH Keywords

change of measurestochastic volatilitydefault riskaffine processesmarket price of riskjump-to-default

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Credit risk (91G40) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (7)

• Systematic equity-based credit risk: A CEV model with jump to default
• Computing the survival probability in the Madan-Unal credit risk model: application to the CDS market
• A two price theory of financial equilibrium with risk management implications
• Title not available (Why is that?)
• A revised version of the Cathcart \& El-Jahel model and its application to CDS market
• A unified framework for pricing credit and equity derivatives
• From insurance risk to credit portfolio management: a new approach to pricing CDOs

Uses Software

• QRM

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