Valuing options with hybrid default risk under the stochastic volatility model

Ana Yun and Geonwoo Kim

Finance Research Letters, 2025, vol. 72, issue C

Abstract: In this paper, we study the valuation of options with hybrid default risk when the underlying assets are driven by a two-factor stochastic volatility model. The hybrid default model is developed by integrating the reduced-form and structural models, and the correlation between the underlying asset and default risk is considered. In the proposed framework, we adopt the probabilistic approach based on the measure-change technique to obtain an explicit pricing formula for the option. Finally, we present several numerical examples including discussions.

Keywords: Default risk; Hybrid model; Stochastic volatility; Characteristic function (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324015502

DOI: 10.1016/j.frl.2024.106521

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