|Fontana, Claudio; Montes, Juan Miguel (2014): A unified approach to pricing and risk management of equity and credit risk. In: Journal of Computational and Applied Mathematics, Vol. 259, No. Part B: pp. 350-361|
We propose a unified framework for equity and credit risk modeling, where the default time is a doubly stochastic random time with intensity driven by an underlying affine factor process. This approach allows for flexible interactions between the defaultable stock price, its stochastic volatility and the default intensity, while maintaining full analytical tractability. We characterize all risk-neutral measures which preserve the affine structure of the model and show that risk management as well as pricing problems can be dealt with efficiently by shifting to suitable survival measures. As an example, we consider a jump- to-default extension of the Heston stochastic volatility model.
|Keywords:||Default risk; Affine processes; Stochastic volatility; Market price of risk; Change of measure; Jump-to-default|
|Faculties:||Mathematics, Computer Science and Statistics > Mathematics > Workgroup Financial Mathematics|
|Subjects:||300 Social sciences > 310 Statistics|
300 Social sciences > 330 Economics
500 Science > 510 Mathematics
|Deposited On:||17. Jan 2014 16:34|
|Last Modified:||29. Apr 2016 09:15|
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