Pricing Vulnerable European Options under Lévy Process with Stochastic Volatility
Joint Authors
Ma, Chaoqun
Yue, Shengjie
Ren, Yishuai
Source
Discrete Dynamics in Nature and Society
Issue
Vol. 2018, Issue 2018 (31 Dec. 2018), pp.1-16, 16 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2018-10-23
Country of Publication
Egypt
No. of Pages
16
Main Subjects
Abstract EN
This paper considers the pricing issue of vulnerable European option when the dynamics of the underlying asset value and counterparty’s asset value follow two correlated exponential Lévy processes with stochastic volatility, and the stochastic volatility is divided into the long-term and short-term volatility.
A mean-reverting process is introduced to describe the common long-term volatility risk in underlying asset price and counterparty’s asset value.
The short-term fluctuation of stochastic volatility is governed by a mean-reverting process.
Based on the proposed model, the joint moment generating function of underlying log-asset price and counterparty’s log-asset value is explicitly derived.
We derive a closed-form solution for the vulnerable European option price by using the Fourier inversion formula for distribution functions.
Finally, numerical simulations are provided to illustrate the effects of stochastic volatility, jump risk, and counterparty credit risk on the vulnerable option price.
American Psychological Association (APA)
Ma, Chaoqun& Yue, Shengjie& Ren, Yishuai. 2018. Pricing Vulnerable European Options under Lévy Process with Stochastic Volatility. Discrete Dynamics in Nature and Society،Vol. 2018, no. 2018, pp.1-16.
https://search.emarefa.net/detail/BIM-1152481
Modern Language Association (MLA)
Ma, Chaoqun…[et al.]. Pricing Vulnerable European Options under Lévy Process with Stochastic Volatility. Discrete Dynamics in Nature and Society No. 2018 (2018), pp.1-16.
https://search.emarefa.net/detail/BIM-1152481
American Medical Association (AMA)
Ma, Chaoqun& Yue, Shengjie& Ren, Yishuai. Pricing Vulnerable European Options under Lévy Process with Stochastic Volatility. Discrete Dynamics in Nature and Society. 2018. Vol. 2018, no. 2018, pp.1-16.
https://search.emarefa.net/detail/BIM-1152481
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-1152481