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Pricing vulnerable options with jump risk and liquidity risk

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  • Xingchun Wang

    (University of International Business and Economics)

Abstract

In this paper, we consider vulnerable options with jump risk and liquidity risk. In the proposed framework, we allow discontinuous changes in the information processes and the liquidity discount factors as well, and default risk is taken into consideration. Specially, we investigate the effect of jumps in the liquidity discount factors and find that the effects of jumps in the liquidity discount factors are stable for different maturities and alternative moneynesses. Further, option prices behave differently with respect to alternative intensities of common jumps, depending on whether there are jumps in the liquidity discount factors or not.

Suggested Citation

  • Xingchun Wang, 2021. "Pricing vulnerable options with jump risk and liquidity risk," Review of Derivatives Research, Springer, vol. 24(3), pages 243-260, October.
    • Handle: RePEc:kap:revdev:v:24:y:2021:i:3:d:10.1007_s11147-021-09177-5
    DOI: 10.1007/s11147-021-09177-5
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    Cited by:

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    4. Wang, Xingchun, 2022. "Pricing vulnerable options with stochastic liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Vulnerable options; Liquidity risk; Liquidity discount factor; Counterparty Default risk; Jump-diffusion processes;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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