Incorporating default risk into the Black-Scholes model using stochastic barrier option pricing theory

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dc.contributor.authorRich, Don R.en
dc.contributor.committeechairChance, Don M.en
dc.contributor.committeememberMorgan, George E.en
dc.contributor.committeememberZia, Royce K. P.en
dc.contributor.committeememberReynolds, Marion R. Jr.en
dc.contributor.committeememberDenis, David J.en
dc.contributor.committeememberKadlec, Gregory B.en
dc.contributor.departmentFinanceen
dc.date.accessioned2014-03-14T21:14:30Zen
dc.date.adate2008-06-06en
dc.date.available2014-03-14T21:14:30Zen
dc.date.issued1993en
dc.date.rdate2008-06-06en
dc.date.sdate2008-06-06en
dc.description.abstractThe valuation of many types of financial contracts and contingent claim agreements is complicated by the possibility that one party will default on their contractual obligations. This dissertation develops a general model that prices Black-Scholes options subject to intertemporal default risk using stochastic barrier option pricing theory. The explicit closed-form solution is obtained by generalizing the reflection principle to k-space to determine the appropriate transition density function. The European analytical valuation formula has a straightforward economic interpretation and preserves much of the intuitive appeal of the traditional Black-Scholes model. The hedging properties of this model are compared and contrasted with the default-free model. The model is extended to include partial recoveries. In one situation, the option holder is assumed to recover α (a constant) percent of the value of the writer’s assets at the time of default. This version of the partial recovery option leads to an analytical valuation formula for a first passage option - an option with a random payoff at a random time.en
dc.description.degreePh. D.en
dc.format.extentxiii, 209 leavesen
dc.format.mediumBTDen
dc.format.mimetypeapplication/pdfen
dc.identifier.otheretd-06062008-171359en
dc.identifier.sourceurlhttp://scholar.lib.vt.edu/theses/available/etd-06062008-171359/en
dc.identifier.urihttp://hdl.handle.net/10919/38470en
dc.language.isoenen
dc.publisherVirginia Techen
dc.relation.haspartLD5655.V856_1993.R574.pdfen
dc.relation.isformatofOCLC# 30859605en
dc.rightsIn Copyrighten
dc.rights.urihttp://rightsstatements.org/vocab/InC/1.0/en
dc.subject.lccLD5655.V856 1993.R574en
dc.subject.lcshDefault (Finance)en
dc.subject.lcshOptions (Finance) -- Prices -- Mathematical modelsen
dc.subject.lcshStochastic analysisen
dc.titleIncorporating default risk into the Black-Scholes model using stochastic barrier option pricing theoryen
dc.typeDissertationen
dc.type.dcmitypeTexten
thesis.degree.disciplineFinanceen
thesis.degree.grantorVirginia Polytechnic Institute and State Universityen
thesis.degree.leveldoctoralen
thesis.degree.namePh. D.en

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