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Pricing Equations In Jump-To-Default Models

Author

Listed:
  • HANNAH DYRSSEN

    (Uppsala University, Box 480, 75106 Uppsala, Sweden)

  • ERIK EKSTRÖM

    (Uppsala University, Box 480, 75106 Uppsala, Sweden)

  • JOHAN TYSK

    (Uppsala University, Box 480, 75106 Uppsala, Sweden)

Abstract

We study pricing equations in jump-to-default models, and we provide conditions under which the option price is the unique classical solution, with a special focus on boundary conditions. In particular, we find precise conditions ensuring that the option price at the default boundary coincides with the recovery payment. We also study spatial convexity of the option price, and we explore the connection between preservation of convexity and parameter monotonicity.

Suggested Citation

  • Hannah Dyrssen & Erik Ekström & Johan Tysk, 2014. "Pricing Equations In Jump-To-Default Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-13.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:03:n:s0219024914500198
    DOI: 10.1142/S0219024914500198
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    Cited by:

    1. Dean Fantazzini & Stephan Zimin, 2020. "A multivariate approach for the simultaneous modelling of market risk and credit risk for cryptocurrencies," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(1), pages 19-69, March.
    2. Andrea De Martino & Edward Manuel Ruiz Crosby & Roberto Stagni, 2017. "A unified framework for pricing credit and equity derivatives," Working Papers 116, Peruvian Economic Association.

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