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Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes
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Liang, Gechun and Wang, Xingchun (2021) Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes. Review of Derivatives Research, 24 (1). pp. 1-30. doi:10.1007/s11147-020-09167-z ISSN 1380-6645.
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Official URL: http://dx.doi.org/10.1007/s11147-020-09167-z
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.
Item Type: | Journal Article | ||||||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||||||
Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||||||||
Library of Congress Subject Headings (LCSH): | Options (Finance) -- Prices -- Mathematical models, Credit -- Mathematical models, Credit ratings -- Mathematical models, Risk management -- Mathematical models | ||||||||||||
Journal or Publication Title: | Review of Derivatives Research | ||||||||||||
Publisher: | Springer | ||||||||||||
ISSN: | 1380-6645 | ||||||||||||
Official Date: | April 2021 | ||||||||||||
Dates: |
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Volume: | 24 | ||||||||||||
Number: | 1 | ||||||||||||
Page Range: | pp. 1-30 | ||||||||||||
DOI: | 10.1007/s11147-020-09167-z | ||||||||||||
Status: | Peer Reviewed | ||||||||||||
Publication Status: | Published | ||||||||||||
Reuse Statement (publisher, data, author rights): | This is a post-peer-review, pre-copyedit version of an article published in Review of Derivatives Research. The final authenticated version is available online at: http://dx.doi.org/10.1007/s11147-020-09167-z | ||||||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||||||
Date of first compliant deposit: | 6 August 2021 | ||||||||||||
Date of first compliant Open Access: | 9 August 2021 | ||||||||||||
RIOXX Funder/Project Grant: |
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