Wei Wang, Xiaonan Su, Shaobo Gan, Linyi Qian, "Pricing Vulnerable European Options Under a Markov-Modulated Jump Diffusion Process," WSEAS Transactions on Mathematics, vol. 16, pp. 123-132, 2017, DOI:
Wei Wang, Xiaonan Su, Shaobo Gan, Linyi Qian. Pricing Vulnerable European Options Under a Markov-Modulated Jump Diffusion Process.
WSEAS Transactions on Mathematics. 2017;16:123-132.
WSEAS Transactions on Mathematics
Print ISSN: 1109-2769, E-ISSN: 2224-2880
Volume 16, 2017
Pricing Vulnerable European Options Under a Markov-Modulated Jump Diffusion Process
Authors: , , ,
Abstract: In this paper, we investigate the pricing of vulnerable European options under a Markov-modulated jump diffusion process. The states of market economy which are described by a two-state continuous time Markov-chain are explained as a stable state and a high volatility state. The dynamic of the risky asset is described by a Markov-modulated geometry Brownian motion when the market state is stable, otherwise, it follows a Markov-modulated jump diffusion process. We consider two types of models to describe default risk: one is the structural model, the other is the reduced form model. By utilizing techniques of measure changes, some analytic formulas for pricing vulnerable European options are derived under these models.
Pages: 123-132 WSEAS Transactions on Mathematics, ISSN / E-ISSN: 1109-2769 / 2224-2880, Volume 16, 2017, Art. #15 DOI: *As the DOI is a unique identifier, it is already available in the pdf version.
**The DOI link will be activated in the first midst of January 2026.
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