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

Author

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  • 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)

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.

Suggested Citation

  • Shican Liu & Yanli Zhou & Benchawan Wiwatanapataphee & Yonghong Wu & Xiangyu Ge, 2018. "The Study of Utility Valuation of Single-Name Credit Derivatives with the Fast-Scale Stochastic Volatility Correction," Sustainability, MDPI, vol. 10(4), pages 1-21, March.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:4:p:1027-:d:138895
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    References listed on IDEAS

    as
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