Pricing basket spread options with default risk under Heston–Nandi GARCH models

Xingchun Wang () and Han Zhang

The North American Journal of Economics and Finance, 2022, vol. 59, issue C

Abstract: In this paper, we investigate basket spread options under the Heston–Nandi GARCH model. Moreover, we adopt the reduced-form model to capture default risk, which is correlated with all underlying assets. Because of the nonexistence of the analytical fair values, we obtain a closed-form approximated pricing formula of basket spread options with default risk. Finally, we examine the accuracy of approximations and then use the proposed formulae to illustrate the effect of the number of the underlying assets and default risk as well.

Keywords: Basket spread options; Basket options; GARCH models; Default risk (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001960

DOI: 10.1016/j.najef.2021.101596

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