The possibility of default risk of an option writer becomes a more important issue in over-the-counter option market when systemic risk increases. It is desirable for the option price to reflect the default risk. On the other hand, it is known that a single scale, single factor stochastic volatility model such as the well-known Heston model would not price correctly in- and out-of-the money options. So, this paper studies the pricing of defaultable options under a multiscale generalized Heston's stochastic volatility model introduced by Fouque and Lorig (2011) to resolve these issues. We derive an explicit solution formula for the defaultable option price and investigate the characteristics of the resultant price in comparison to the price under the original Heston model.
|Number of pages||12|
|Journal||Mathematics and Computers in Simulation|
|Publication status||Published - 2018 Feb|
Bibliographical noteFunding Information:
We thank the anonymous reviewers for their valuable comments and suggestions to improve the paper. The research of M.-K. Lee was supported by the National Research Foundation of Korea NRF-2016R1D1A3B03933060 and the research of J.-H. Kim was supported by NRF-2017R1A2B4003226 .
© 2017 International Association for Mathematics and Computers in Simulation (IMACS)
All Science Journal Classification (ASJC) codes
- Theoretical Computer Science
- Computer Science(all)
- Numerical Analysis
- Modelling and Simulation
- Applied Mathematics