Pricing Options with Credit Risk in Markovian Regime-Switching Markets

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 Mar...

Full description

Bibliographic Details
Main Authors: Jinzhi Li, Shixia Ma
Format: Article
Language:English
Published: Hindawi Limited 2013-01-01
Series:Journal of Applied Mathematics
Online Access:http://dx.doi.org/10.1155/2013/621371
Description
Summary: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.
ISSN:1110-757X
1687-0042