PRICING EQUATIONS IN JUMP-TO-DEFAULT MODELS

Hannah Dyrssen, Erik Ekström and Johan Tysk ()
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Hannah Dyrssen: Uppsala University, Box 480, 75106 Uppsala, Sweden
Erik Ekström: Uppsala University, Box 480, 75106 Uppsala, Sweden
Johan Tysk: Uppsala University, Box 480, 75106 Uppsala, Sweden

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 03, 1-13

Abstract: We study pricing equations in jump-to-default models, and we provide conditions under which the option price is the unique classical solution, with a special focus on boundary conditions. In particular, we find precise conditions ensuring that the option price at the default boundary coincides with the recovery payment. We also study spatial convexity of the option price, and we explore the connection between preservation of convexity and parameter monotonicity.

Keywords: Jump-to-default model; credit risk; martingales; the Black–Scholes equation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024914500198

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