Derivative Pricing with Multivariate Stochastic Volatility: Application to Credit Risk

Gourieroux, Christian; Sufana, Razvan

doi:10.2139/ssrn.757312

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Derivative Pricing with Multivariate Stochastic Volatility: Application to Credit Risk

Les Cahiers du CREF of HEC Montréal Working Paper No. CREF 04-09

49 Pages Posted: 18 Jul 2005

See all articles by Christian Gourieroux

Christian Gourieroux

University of Toronto - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE); National Bureau of Economic Research (NBER)

Razvan Sufana

University of Toronto - Department of Economics

Date Written: May 2004

Abstract

This paper extends to the multiasset framework the closed-form solution for options with stochastic volatility derived in Heston (1993) and Ball and Roma (1994). This extension introduces a risk premium in the return equation and considers Wishart dynamics for the process of the stochastic volatility matrix, which is the multiasset analogue of the model of Cox, Ingersoll, and Ross (1985). This approach is used to extend Merton's model for corporate default to a framework with stochastic liability.

Keywords: Stochastic volatility, derivative pricing, Wishart process, credit risk

JEL Classification: G12, G13

Suggested Citation: Suggested Citation

Gourieroux, Christian and Sufana, Razvan, Derivative Pricing with Multivariate Stochastic Volatility: Application to Credit Risk (May 2004). Les Cahiers du CREF of HEC Montréal Working Paper No. CREF 04-09, Available at SSRN: https://ssrn.com/abstract=757312 or http://dx.doi.org/10.2139/ssrn.757312