PRICING EQUITY DERIVATIVES SUBJECT TO BANKRUPTCY

• Published in: Mathematical finance Vol. 16; no. 2; pp. 255 - 282
• Main Author: Linetsky, Vadim
• Format: Journal Article
• Language: English
• Published: 350 Main Street , Malden , MA 02148 , USA , and 9600 Garsington Road , Oxford OX4 2DQ , UK Blackwell Publishing, Inc 01.04.2006; Wiley Blackwell; Blackwell Publishing Ltd
• Series: Mathematical Finance
• Subjects: Asian options; Bankruptcy; Brownian exponential functionals; Corporate bonds; Corporate debt; Credit; Credit risk; credit spread; Derivatives; Differential equations; Financial economics; Financial models; hazard rate; implied volatility skew; Mathematical economics; Mathematical models; Options on stocks; Risk management; Schrödinger operator with Morse potential; Securities prices; spectral expansions; Statistical analysis; Stochastic models; Stock options; Studies; Volatility

We solve in closed form a parsimonious extension of the Black–Scholes–Merton model with bankruptcy where the hazard rate of bankruptcy is a negative power of the stock price. Combining a scale change and a measure change, the model dynamics is reduced to a linear stochastic differential equation who...