The Study of Utility Valuation of Single-Name Credit Derivatives with the Fast-Scale Stochastic Volatility Correction

Shican Liu, Yanli Zhou, Benchawan Wiwatanapataphee, Yonghong Wu and Xiangyu Ge
Additional contact information
Shican Liu: Department of Mathematics and Statistics, Curtin University, Perth, WA 6845, Australia
Yanli Zhou: School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, China
Benchawan Wiwatanapataphee: Department of Mathematics and Statistics, Curtin University, Perth, WA 6845, Australia
Yonghong Wu: Department of Mathematics and Statistics, Curtin University, Perth, WA 6845, Australia
Xiangyu Ge: Department of Finance, Wuhan Technology and Business University, Wuhan 430065, China

Sustainability, 2018, vol. 10, issue 4, 1-21

Abstract: In this paper, we study the risk aversion on valuing the single-name credit derivatives with the fast-scale stochastic volatility correction. Two specific utility forms, including the exponential utility and the power utility, are tested as examples in our work. We apply the asymptotic approximation to obtain the solution of the non-linear PDE, and make a comparison of the utility before and after the stochastic volatility modification, and we find that incorporation of fast-scale volatility will lower down the utility. By using the indifference price, we also give the yield spread impacted by the risk adverse valuation. We find that by considering the default risk, yield spread is sloping in a short period and converge in a long run.

Keywords: utility; credit derivatives; stochastic volatility; asymptotic approximation; risk aversion (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2071-1050/10/4/1027/pdf (application/pdf)
https://www.mdpi.com/2071-1050/10/4/1027/ (text/html)

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:gam:jsusta:v:10:y:2018:i:4:p:1027-:d:138895

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().