First-Passage Time Model Driven by Lévy Process for Pricing CoCos
Joint Authors
Source
Mathematical Problems in Engineering
Issue
Vol. 2017, Issue 2017 (31 Dec. 2017), pp.1-13, 13 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2017-01-11
Country of Publication
Egypt
No. of Pages
13
Main Subjects
Abstract EN
Contingent convertible bonds (CoCos) are typical form of contingent capital that converts into equity of issuing firm or writes down if a prespecified trigger occurs.
This paper proposes a general Lévy framework for pricing CoCos.
The Lévy framework indicates that the difficulty in giving closed-form expression for CoCos price is the possible introduction of the Lévy process whose first-passage time problem has not been solved.
According to characteristics of new Lévy measure after the measure transform, three specific Lévy models driven by drifted Brownian motion, spectrally negative Lévy process, and double exponential jump diffusion process are proposed to give the solution keeping the form of the driving process unchanged under the measure transform.
These three Lévy models provide closed-form expressions for CoCos price while the latter two possess them up to Laplace transform, whose pricing results are given by combining with numerical Fourier inversion and Laplace inversion.
Numerical results show that negative jumps have large influence on CoCos pricing and the Black-Scholes model would overestimate CoCos price by simply compressing jumps information into volatility while the other two models would give more accurate CoCos price by taking jump risk into consideration.
American Psychological Association (APA)
Su, Xiaoshan& Bai, Manying. 2017. First-Passage Time Model Driven by Lévy Process for Pricing CoCos. Mathematical Problems in Engineering،Vol. 2017, no. 2017, pp.1-13.
https://search.emarefa.net/detail/BIM-1190642
Modern Language Association (MLA)
Su, Xiaoshan& Bai, Manying. First-Passage Time Model Driven by Lévy Process for Pricing CoCos. Mathematical Problems in Engineering No. 2017 (2017), pp.1-13.
https://search.emarefa.net/detail/BIM-1190642
American Medical Association (AMA)
Su, Xiaoshan& Bai, Manying. First-Passage Time Model Driven by Lévy Process for Pricing CoCos. Mathematical Problems in Engineering. 2017. Vol. 2017, no. 2017, pp.1-13.
https://search.emarefa.net/detail/BIM-1190642
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-1190642