Pricing of vulnerable options under hybrid stochastic and local volatility

Kim, Donghyun; Choi, Sun‐Yong; Yoon, Jihun

doi:10.1016/j.chaos.2021.110846

Cited by 11 publications

(2 citation statements)

References 22 publications

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“…Jeon and Kim [10] used the Mellin transform approach to develop the works of [9] as two types of options. More recently, Wang [11], He et al [12], Kim et al [13] and Jeon et al [14] investigated the pricing of vulnerable options in the presence of stochastic volatility affecting asset price processes. In addition, there have been numerous research on vulnerable options with multi-assets [15][16][17][18][19].…”

Section: Introductionmentioning

confidence: 99%

A Simplified Approach to the Pricing of Vulnerable Options with Two Underlying Assets in an Intensity-Based Model

Kim

2023

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In this paper, we study a simplified approach to determine the pricing formula for vulnerable options involving two correlated underlying assets. We utilize an intensity-based model to describe the credit risk associated with these vulnerable options. Without the change of measure technique, we derive pricing formulas for vulnerable options involving two underlying assets based on the probabilistic approach. We provide closed-form pricing formulas for two specific types of options: the vulnerable exchange option and the vulnerable foreign equity option. Finally, we present numerical results to demonstrate the accuracy of our formulas using the Monte-Carlo method and the effect of various parameters on the price of options.

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Section: Introductionmentioning

confidence: 99%

A Simplified Approach to the Pricing of Vulnerable Options with Two Underlying Assets in an Intensity-Based Model

Kim

2023

Axioms

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“…However, the formula has made many assumptions in advance, for example, the volatility and interest rate of options are assumed to be a constant; the underlying asset follow geometric Brownian motion, etc., is not completely consistent with the actual market situation; thus, the option price calculated by the formula is far from the actual situation. Later, many scholars made corresponding improvements to the model, such as adjusting the time course of the evolution of the underlying asset price, and the interest rate and volatility were subject to a random process [2][3][4][5][6][7][8][9][10][11][12][13][14][15] so as to establish option pricing models closer to the actual situation, such as the CIR model [16,17] and Heston model [18][19][20][21][22].…”

Section: Introductionmentioning

confidence: 99%

Dual-Hybrid Modeling for Option Pricing of CSI 300ETF

2022

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The reasonable pricing of options can effectively help investors avoid risks and obtain benefits, which plays a very important role in the stability of the financial market. The traditional single option pricing model often fails to meet the ideal expectations due to its limited conditions. Combining an economic model with a deep learning model to establish a hybrid model provides a new method to improve the prediction accuracy of the pricing model. This includes the usage of real historical data of about 10,000 sets of CSI 300 ETF options from January to December 2020 for experimental analysis. Aiming at the prediction problem of CSI 300ETF option pricing, based on the importance of random forest features, the Convolutional Neural Network and Long Short-Term Memory model (CNN-LSTM) in deep learning is combined with a typical stochastic volatility Heston model and stochastic interests CIR model in parameter models. The dual hybrid pricing model of the call option and the put option of CSI 300ETF is established. The dual-hybrid model and the reference model are integrated with ridge regression to further improve the forecasting effect. The results show that the dual-hybrid pricing model proposed in this paper has high accuracy, and the prediction accuracy is tens to hundreds of times higher than the reference model; moreover, MSE can be as low as 0.0003. The article provides an alternative method for the pricing of financial derivatives.

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Analytic Method for Pricing Vulnerable External Barrier Options

Kim

Yoon

2022

Comput Econ

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Pricing of vulnerable options under hybrid stochastic and local volatility

Cited by 11 publications

References 22 publications

A Simplified Approach to the Pricing of Vulnerable Options with Two Underlying Assets in an Intensity-Based Model

A Simplified Approach to the Pricing of Vulnerable Options with Two Underlying Assets in an Intensity-Based Model

Dual-Hybrid Modeling for Option Pricing of CSI 300ETF

Analytic Method for Pricing Vulnerable External Barrier Options

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