Pricing vulnerable options with stochastic volatility

Guanying Wang, Xingchun Wang () and Ke Zhou

Physica A: Statistical Mechanics and its Applications, 2017, vol. 485, issue C, 91-103

Abstract: In this paper, we investigate the pricing issue of vulnerable options with stochastic volatility by decomposing stochastic volatility into the long-term and short-term volatility. We describe the short-term fluctuation of stochastic volatility using a mean-reverting process, and assume the long-term volatility to be a constant. Based on the proposed model, we derive a pricing formula of vulnerable options in a special case. Numerical results are presented to illustrate the impacts of two stochastic volatility components on vulnerable option prices.

Keywords: Vulnerable options; Stochastic volatility; Credit risk; OTC markets (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437117304569
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:485:y:2017:i:c:p:91-103

DOI: 10.1016/j.physa.2017.04.146

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().