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Valuing options with hybrid default risk under the stochastic volatility model

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  • Yun, Ana
  • Kim, Geonwoo

Abstract

In this paper, we study the valuation of options with hybrid default risk when the underlying assets are driven by a two-factor stochastic volatility model. The hybrid default model is developed by integrating the reduced-form and structural models, and the correlation between the underlying asset and default risk is considered. In the proposed framework, we adopt the probabilistic approach based on the measure-change technique to obtain an explicit pricing formula for the option. Finally, we present several numerical examples including discussions.

Suggested Citation

  • Yun, Ana & Kim, Geonwoo, 2025. "Valuing options with hybrid default risk under the stochastic volatility model," Finance Research Letters, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324015502
    DOI: 10.1016/j.frl.2024.106521
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    References listed on IDEAS

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    1. Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
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