Abstract
This article develops a closed-form solution of multifactor stochastic volatility option pricing model which is developed from Christoffersen et al. (2009) framework. We apply this model on Credit Spreads, Equity Options, and Risk Management. In particular, we look at the effect of having stochastic volatility in the structural approach and study the effects of time scales on the credit spread yield curves for the stochastic volatility. We argue that this model with multifactor stochastic volatility can produce more realistic credit spreads. Thus, the calibration reveal how the introduction of two volatility factors can generate a wide range of combinations associated with short-term and long-term patterns corresponding to credit spreads. In Second application, we solve the calibration problem of implied volatility surfaces. The results reveal that our model has relatively lowest total MSE and faster computing speed. Finally, our model also can calculate risk-neutral default probability.