Two frameworks for pricing defaultable derivatives

Tsvetelin S. Zaevski, Ognyan Kounchev and Mladen Savov

Chaos, Solitons & Fractals, 2019, vol. 123, issue C, 309-319

Abstract: The purpose of this paper is to present two essentially different schemes for deriving the partial differential equations (PDE) for the price of the so-called defaultable derivatives. In the first one the asset price is represented as a solution of a stochastic differential equation (SDE), stopped at a stochastic time. The second one explores the idea of adding a jump process assuming that the stopping time is the moment of its first jump. We investigate also the role of the loss rate, which represents the loss of the asset at the default moment. In both cases we examine various assumptions and dependencies between the underlying asset, the stopping time, and the loss rate. We examine separately the cases when the underlying asset price is driven by a Brownian motion or by a Lévy process.

Keywords: Stopping times; Default; Risk-neutral measure; Asset pricing; Derivative pricing; Convertible bonds (search for similar items in EconPapers)
JEL-codes: C22 C25 G12 G13 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:123:y:2019:i:c:p:309-319

DOI: 10.1016/j.chaos.2019.04.025

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