Pricing Options with Credit Risk in Markovian Regime-Switching Markets | Zendy

Jinzhi Li | Zendy; Shi-xia Ma | Zendy

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Pricing Options with Credit Risk in Markovian Regime-Switching Markets

Author(s) -

Jinzhi Li,

Shi-xia Ma

Publication year - 2013

Publication title -

journal of applied mathematics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.307

H-Index - 43

eISSN - 1687-0042

pISSN - 1110-757X

DOI - 10.1155/2013/621371

Subject(s) - vasicek model , markov chain , valuation of options , credit risk , jump diffusion , econometrics , valuation (finance) , credit spread (options) , markov process , interest rate , volatility (finance) , stock (firearms) , jump , economics , computer science , mathematics , actuarial science , finance , statistics , physics , quantum mechanics , mechanical engineering , engineering

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

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