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Equity-credit modeling under affine jump-diffusion models with jump-to-default

Author

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  • Tsz Kin Chung

    (Graduate School of Social Sciences, Tokyo Metropolitan University, Japan)

  • Yue Kuen Kwok

    (Department of Mathematics, Hong Kong University of Science and Technology, Hong Kong)

Abstract

This paper considers the stochastic models for pricing credit-sensitive financial derivatives using the joint equity-credit modeling approach. The modeling of credit risk is embedded into a stochastic asset dynamics model by adding the jump-to-default (JtD) feature. We discuss the class of stochastic affine jump-diffusion (AJD) models with JtD and apply the models to price defaultable European options and credit default swaps. Numerical studies of the equity-credit models are also considered. The impact on the pricing behavior of derivative products with the added JtD feature is examined.

Suggested Citation

  • Tsz Kin Chung & Yue Kuen Kwok, 2014. "Equity-credit modeling under affine jump-diffusion models with jump-to-default," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 1-25.
    • Handle: RePEc:wsi:jfexxx:v:01:y:2014:i:02:n:s2345768614500172
    DOI: 10.1142/S2345768614500172
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    1. Boyd, Lawrence W., 2003. "Defining Global Justice: The History of U.S. International Labor Standards Policy. By Edward C. Lorenz. University of Notre Dame Press, 2001. Pp vii, 318. $43.95, cloth; 23.95, paper," The Journal of Economic History, Cambridge University Press, vol. 63(3), pages 914-915, September.
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    Cited by:

    1. 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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