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arXiv · 1504.02543

Weak Convergence of Equity Derivatives Pricing with Default Risk

Gaoxiu Qiao·Qiang Yao
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Abstract

This paper presents a discrete--time equity derivatives pricing model with default risk in a no--arbitrage framework. Using the equity--credit reduced form approach where default intensity mainly depends on the firm's equity value, we deduce the Arrow--Debreu state prices and the explicit pricing result in discrete time after embedding default risk in the pricing model. We prove that the discrete--time defaultable equity derivatives pricing has convergence stability, and it converges weakly to the continuous--time pricing results.

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Gaoxiu Qiao, Qiang Yao. 2015-04-10. Weak Convergence of Equity Derivatives Pricing with Default Risk. https://doi.org/10.1016/j.spl.2015.04.015

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