Structural Credit Modeling Under Stochastic Volatility | Zendy

Marcos Escobar | Zendy; Tim Friederich | Zendy; Mikhail Krayzler | Zendy; Luis Seco | Zendy; Rudi Zagst | Zendy

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Structural Credit Modeling Under Stochastic Volatility

Author(s) -

Marcos Escobar,

Tim Friederich,

Mikhail Krayzler,

Luis Seco,

Rudi Zagst

Publication year - 2012

Publication title -

international journal of statistics and probability

Language(s) - English

Resource type - Journals

eISSN - 1927-7040

pISSN - 1927-7032

DOI - 10.5539/ijsp.v1n1p20

Subject(s) - stochastic volatility , heston model , estimator , econometrics , volatility (finance) , constant elasticity of variance model , implied volatility , economics , computer science , mathematics , sabr volatility model , statistics

This paper presents a structural credit model with underlying stochastic volatility, a CIR process, combining the Black/Cox framework with the Heston Model. We allow to calibrate a Heston Model for a non-observable process as underlying of the Black/Cox Model. A closed-form solution for the price of a down-and-out call option on the assets with the debt as barrier and strike price is derived using the concept of optional sampling. Furthermore, estimators are derived with the Method of Moments for Hidden Markov Chains. As an application in Statistical Finance, the default probabilities of Merrill Lynch during the financial crisis are examined

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