Equity-credit modeling under affine jump-diffusion models with jump-to-default

Tsz Kin Chung () and Yue Kuen Kwok ()
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Tsz Kin Chung: Graduate School of Social Sciences, Tokyo Metropolitan University, Japan
Yue Kuen Kwok: Department of Mathematics, Hong Kong University of Science and Technology, Hong Kong

Journal of Financial Engineering (JFE), 2014, vol. 01, issue 02, 1-25

Abstract: This paper considers the stochastic models for pricing credit-sensitive financial derivatives using the joint equity-credit modeling approach. The modeling of credit risk is embedded into a stochastic asset dynamics model by adding the jump-to-default (JtD) feature. We discuss the class of stochastic affine jump-diffusion (AJD) models with JtD and apply the models to price defaultable European options and credit default swaps. Numerical studies of the equity-credit models are also considered. The impact on the pricing behavior of derivative products with the added JtD feature is examined.

Keywords: Credit-sensitive derivatives; jump-to-default; affine jump-diffusion models (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1142/S2345768614500172

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