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Valuing fade-in options with default risk in Heston–Nandi GARCH models

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  • Xingchun Wang

    (University of International Business and Economics)

Abstract

In this paper, we present a pricing model to value fade-in options with default risk, where the underlying asset price is driven by the Heston–Nandi GARCH process and is correlated with the intensity process. The explicit pricing formulae are obtained, which contain pricing formulae of vanilla European options with/without default risk as special cases. Finally, a comparative analysis of the impacts of default risk is provided.

Suggested Citation

  • Xingchun Wang, 2022. "Valuing fade-in options with default risk in Heston–Nandi GARCH models," Review of Derivatives Research, Springer, vol. 25(1), pages 1-22, April.
    • Handle: RePEc:kap:revdev:v:25:y:2022:i:1:d:10.1007_s11147-021-09179-3
    DOI: 10.1007/s11147-021-09179-3
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    Cited by:

    1. Panhong Cheng & Zhihong Xu & Zexing Dai, 2023. "Valuation of vulnerable options with stochastic corporate liabilities in a mixed fractional Brownian motion environment," Mathematics and Financial Economics, Springer, volume 17, number 3, December.

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    More about this item

    Keywords

    Fade-in options; Default risk; GARCH processes; Reduced form models;
    All these keywords.

    JEL classification:

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

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