Weak Convergence of Equity Derivatives Pricing with Default Risk

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.