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.