Pricing Options with Credit Risk in Markovian Regime-Switching Markets
This paper investigates the valuation of European option with credit risk in a reduced form model when the stock price is driven by the so-called Markov-modulated jump-diffusion process, in which the arrival rate of rare events and the volatility rate of stock are controlled by a continuous-time Mar...
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| Format: | Article |
| Language: | English |
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Wiley
2013-01-01
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| Series: | Journal of Applied Mathematics |
| Online Access: | http://dx.doi.org/10.1155/2013/621371 |
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| _version_ | 1832558546569396224 |
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| author | Jinzhi Li Shixia Ma |
| author_facet | Jinzhi Li Shixia Ma |
| author_sort | Jinzhi Li |
| collection | DOAJ |
| description | This paper investigates the valuation of European option with credit risk in a reduced form model when the stock price is driven by the so-called Markov-modulated jump-diffusion process, in which the arrival rate of rare events and the volatility rate of stock are controlled by a continuous-time Markov chain. We also assume that the interest rate and the default intensity follow the Vasicek models whose parameters are governed by the same Markov chain. We study the pricing of European option and present numerical illustrations. |
| format | Article |
| id | doaj-art-9e3e98c579504584b65f5f95c60337c8 |
| institution | Kabale University |
| issn | 1110-757X 1687-0042 |
| language | English |
| publishDate | 2013-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Journal of Applied Mathematics |
| spelling | doaj-art-9e3e98c579504584b65f5f95c60337c82025-02-03T01:32:14ZengWileyJournal of Applied Mathematics1110-757X1687-00422013-01-01201310.1155/2013/621371621371Pricing Options with Credit Risk in Markovian Regime-Switching MarketsJinzhi Li0Shixia Ma1College of Sciences, Minzu University of China, Beijing 100081, ChinaCollege of Sciences, Hebei University of Technology, Tianjin 300401, ChinaThis paper investigates the valuation of European option with credit risk in a reduced form model when the stock price is driven by the so-called Markov-modulated jump-diffusion process, in which the arrival rate of rare events and the volatility rate of stock are controlled by a continuous-time Markov chain. We also assume that the interest rate and the default intensity follow the Vasicek models whose parameters are governed by the same Markov chain. We study the pricing of European option and present numerical illustrations.http://dx.doi.org/10.1155/2013/621371 |
| spellingShingle | Jinzhi Li Shixia Ma Pricing Options with Credit Risk in Markovian Regime-Switching Markets Journal of Applied Mathematics |
| title | Pricing Options with Credit Risk in Markovian Regime-Switching Markets |
| title_full | Pricing Options with Credit Risk in Markovian Regime-Switching Markets |
| title_fullStr | Pricing Options with Credit Risk in Markovian Regime-Switching Markets |
| title_full_unstemmed | Pricing Options with Credit Risk in Markovian Regime-Switching Markets |
| title_short | Pricing Options with Credit Risk in Markovian Regime-Switching Markets |
| title_sort | pricing options with credit risk in markovian regime switching markets |
| url | http://dx.doi.org/10.1155/2013/621371 |
| work_keys_str_mv | AT jinzhili pricingoptionswithcreditriskinmarkovianregimeswitchingmarkets AT shixiama pricingoptionswithcreditriskinmarkovianregimeswitchingmarkets |