Pricing vulnerable options with correlated jump-diffusion processes depending on various states of the economy
In this paper, we use a Markov-modulated regime switching approach to model various states of the economy, and study the pricing of vulnerable European options when the dynamics of the underlying asset value and the asset value of the counterparty follow two correlated jump-diffusion processes under...
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| Veröffentlicht in: | Quantitative finance 2016-07, Vol.16 (7), p.1129-1145 |
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| container_title | Quantitative finance |
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| creator | Niu, Huawei Wang, Dingcheng |
| description | In this paper, we use a Markov-modulated regime switching approach to model various states of the economy, and study the pricing of vulnerable European options when the dynamics of the underlying asset value and the asset value of the counterparty follow two correlated jump-diffusion processes under regime switching. The correlation is modelled by both the diffusion parts and the pure jump parts which describe the uncertainty of the value of the risky assets. We develop a method to determine an equivalent martingale measure and a parsimonious representation of the risk-neutral density is provided. Based on this, we derive an analytical pricing formula for vulnerable options via two-dimensional Laplace transforms, and implement the formula through numerical Laplace inversion. |
| doi_str_mv | 10.1080/14697688.2015.1090623 |
| format | Article |
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| ispartof | Quantitative finance, 2016-07, Vol.16 (7), p.1129-1145 |
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| language | eng |
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| source | EBSCOhost Business Source Complete; Taylor & Francis:Master (3349 titles) |
| subjects | Correlation analysis Credit risk Economic models Jump-diffusion Laplace transforms Regime switching Securities prices Studies Vulnerable option |
| title | Pricing vulnerable options with correlated jump-diffusion processes depending on various states of the economy |
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