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Valuation of Asian options with default risk under GARCH models

Author

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  • Wang, Xingchun
Abstract
In this paper, we consider Asian options with default risk under GARCH models. We adopt a GARCH process to describe the dynamics of the underlying asset and consider default risk in a reduced form model. In addition, the correlation between the intensity of default and the variance of the underlying asset is considered. In the proposed framework, we obtain closed-form pricing formulae of Asian options with/without default risk and show Asian option values in numerical examples. Specifically, the price of European (Asian) call options with default risk is not equal to the one of European (Asian) call options without default risk even when the initial value of the intensity equals zero.

Suggested Citation

  • Wang, Xingchun, 2020. "Valuation of Asian options with default risk under GARCH models," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 27-40.
    • Handle: RePEc:eee:reveco:v:70:y:2020:i:c:p:27-40
    DOI: 10.1016/j.iref.2020.06.019
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    Cited by:

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    2. Guo, Peidong & Zhang, Jizhou & Wang, Qian, 2020. "Path-dependent game options with Asian features," Chaos, Solitons & Fractals, Elsevier, vol. 141(C).
    3. Xingchun Wang, 2021. "Pricing vulnerable options with jump risk and liquidity risk," Review of Derivatives Research, Springer, vol. 24(3), pages 243-260, October.
    4. He, Ting, 2023. "An imprecise pricing model for Asian options based on Nonparametric predictive inference," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    5. Xingchun Wang & Han Zhang, 2024. "Pricing Fade-in Options Under GARCH-Jump Processes," Computational Economics, Springer;Society for Computational Economics, vol. 64(4), pages 2563-2584, October.
    6. Dibooglu, Sel & Cevik, Emrah I. & Tamimi, Hussein A. Hassan Al, 2022. "Credit default risk in Islamic and conventional banks: Evidence from a GARCH option pricing model," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 396-411.

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    More about this item

    Keywords

    Asian options; Default risk; GARCH Models;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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