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Pricing Options with Credit Risk in Markovian Regime‐Switching Markets

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  • Jinzhi Li
  • Shixia Ma

Abstract

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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  • Jinzhi Li & Shixia Ma, 2013. "Pricing Options with Credit Risk in Markovian Regime‐Switching Markets," Journal of Applied Mathematics, John Wiley & Sons, vol. 2013(1).
    • Handle: RePEc:wly:jnljam:v:2013:y:2013:i:1:n:621371
    DOI: 10.1155/2013/621371
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    Cited by:

    1. Eric Djeutcha & Jules Sadefo Kamdem, 2024. "Pricing for a vulnerable bull spread options using a mixed modified fractional Hull–White–Vasicek model," Annals of Operations Research, Springer, vol. 334(1), pages 101-131, March.

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