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

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

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

Recommendations

• A unified framework for pricing credit and equity derivatives
• Credit derivatives pricing with stochastic volatility models
• Time-changed Markov processes in unified credit-equity modeling
• Systematic equity-based credit risk: A CEV model with jump to default
• Pricing and hedging in affine models with possibility of default

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)

Cites Work

• Title not available (Why is that?)
• A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
• A YIELD‐FACTOR MODEL OF INTEREST RATES
• A general version of the fundamental theorem of asset pricing
• Affine processes and applications in finance
• Transform Analysis and Asset Pricing for Affine Jump-diffusions
• Affine processes for dynamic mortality and actuarial valuations
• SOLVABLE AFFINE TERM STRUCTURE MODELS
• Default times, no-arbitrage conditions and changes of probability measures
• FORWARD START OPTIONS UNDER STOCHASTIC VOLATILITY AND STOCHASTIC INTEREST RATES
• Affine processes on positive semidefinite matrices
• Credit risk: Modelling, valuation and hedging
• Intermediate Probability
• Term-structure models. A graduate course
• Equivalent and absolutely continuous measure changes for jump-diffusion processes
• A jump to default extended CEV model: an application of Bessel processes
• The Shape and Term Structure of the Index Option Smirk: Why Multifactor Stochastic Volatility Models Work So Well
• Local Volatility Enhanced by a Jump to Default
• On changes of measure in stochastic volatility models
• Systematic equity-based credit risk: A CEV model with jump to default
• DEFAULT RISK AND DIVERSIFICATION: THEORY AND EMPIRICAL IMPLICATIONS
• A note on the Dai-Singleton canonical representation of affine term structure models
• HEDGING UNDER THE HESTON MODEL WITH JUMP-TO-DEFAULT
• Pricing Options on Defaultable Stocks*
• Title not available (Why is that?)
• Pricing and Hedging in Affine Models with Possibility of Default
• Credit risk and incomplete information: filtering and EM parameter estimation

Cited In (5)

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

Uses Software

• QRM

This page was built for publication: A unified approach to pricing and risk management of equity and credit risk

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2349596)