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This paper extends the dynamic copula model for bivariate option pricing in Goorbergh et al (2004) to price credit spread options. We use GARCH-t model to describe the marginal distributions for corporate bonds and treasury, and combine them with dynamic Gaussian copula to obtain the joint distribution. As an application we use this model to price credit spread options written on American corporate...
Levy processes have become cumulatively popular in finance because they describe financial markets in a more accurate way than models based in Brownian motion. For the purpose of pricing debt value by structural model, we not only assume the interest rate is stochastic and model the dynamics of firm value return as a Levy process by the sum of a Brownian motion and compound Poisson process which is...
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