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Pricing path-dependent equity and credit derivatives within a general hybrid equity-credit framework: A unified CTMC approximation approach

Author

Listed:
  • Cai, Ning
  • Wang, Siyi
  • Zhang, Wei
  • Lin, Haohong

Abstract

We propose a unified closed-form approximation approach to pricing path-dependent equity and credit derivatives such as defaultable single- and double-barrier options and equity default swaps (EDSs) under jump-to-default extended exponential Lévy models with local volatilities. This rich class of hybrid equity-credit models allows for state-dependent volatilities, state-dependent default intensities, and general Lévy types with either finite or infinite activities and with either finite or infinite variations, and includes many important hybrid equity-credit models as special cases. The convergences of the closed-form approximation pricing formulas are theoretically proved, and the corresponding convergence rates are also theoretically established. Numerical results indicate that our pricing method is accurate and efficient under a wide range of hybrid equity-credit models.

Suggested Citation

  • Cai, Ning & Wang, Siyi & Zhang, Wei & Lin, Haohong, 2025. "Pricing path-dependent equity and credit derivatives within a general hybrid equity-credit framework: A unified CTMC approximation approach," Journal of Economic Dynamics and Control, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:dyncon:v:180:y:2025:i:c:s0165188925001447
    DOI: 10.1016/j.jedc.2025.105178
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    References listed on IDEAS

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