Probability for transition of business cycle and pricing of options with correlated credit risk

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Hacettepe Journal of Mathematics and Statistics
Volume:45 Issue:1
Probability for transition of business cycle and pricing of options with correlated credit risk

Probability for transition of business cycle and pricing of options with correlated credit risk

Authors : Geonwoo KİM

Pages : 195-206

View : 46 | Download : 15

Publication Date : 2016-02-01

Article Type : Research Paper

Abstract :In this paper we propose the transition probability of business cycle for the pricing of options with credit risk. In order to describe business cycles of markets, the regime switching model is considered. We provide the probability density functions of the occupation time of the high volatility regime via Laplace transforms. Using these functions we derive the analytic valuation formulae for options with correlated credit risk and business cycle. We also illustrate the important properties of options with numerical graphs.
Keywords : Business cycle, Option pricing, Credit risk, Occupation time

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