Valuing fade-in options with default risk in Heston–Nandi GARCH models

Valuing fade-in options with default risk in Heston–Nandi GARCH models

In this paper, we present a pricing model to value fade-in options with default risk, where the underlying asset price is driven by the Heston–Nandi GARCH process and is correlated with the intensity process. The explicit pricing formulae are obtained, which contain pricing formulae of vanilla Europ...

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Veröffentlicht in:Review of derivatives research 2022-04, Vol.25 (1), p.1-22
1. Verfasser: Wang, Xingchun
Format: Artikel
Sprache:eng
Schlagworte:
Default
Derivatives
Economics and Finance
Finance
Investments and Securities
Options trading
Risk exposure
Stochastic models
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Zusammenfassung:In this paper, we present a pricing model to value fade-in options with default risk, where the underlying asset price is driven by the Heston–Nandi GARCH process and is correlated with the intensity process. The explicit pricing formulae are obtained, which contain pricing formulae of vanilla European options with/without default risk as special cases. Finally, a comparative analysis of the impacts of default risk is provided.
ISSN:1380-6645
1573-7144
DOI:10.1007/s11147-021-09179-3