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On the Default Probability in a Regime-Switching Regulated Market

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Listed:
  • Lijun Bo

    (Xidian University)

  • Yongjin Wang

    (Nankai University)

  • Xuewei Yang

    (Nanjing University)

Abstract

This paper considers asset dynamics in a regulated (controlled) market, where the macroeconomic environment is taken into account. A regime-switching reflected stochastic process with two-sided barriers is proposed for modeling asset price dynamics. We study a default problem with the default time being defined as the first passage time of the price dynamics. By solving a pair of interacting ordinary differential equations (ODEs), we obtain an explicit formula for the Laplace transform (LT) of the default time. Some numerical results are given for illustration.

Suggested Citation

  • Lijun Bo & Yongjin Wang & Xuewei Yang, 2014. "On the Default Probability in a Regime-Switching Regulated Market," Methodology and Computing in Applied Probability, Springer, vol. 16(1), pages 101-113, March.
    • Handle: RePEc:spr:metcap:v:16:y:2014:i:1:d:10.1007_s11009-012-9301-z
    DOI: 10.1007/s11009-012-9301-z
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    References listed on IDEAS

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    1. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
    2. Robert J. Elliott & Leunglung Chan & Tak Kuen Siu, 2005. "Option pricing and Esscher transform under regime switching," Annals of Finance, Springer, vol. 1(4), pages 423-432, October.
    3. Lijun Bo & Dan Tang & Yongjin Wang & Xuewei Yang, 2011. "On the conditional default probability in a regulated market: a structural approach," Quantitative Finance, Taylor & Francis Journals, vol. 11(12), pages 1695-1702.
    4. Kim, Mi Ae & Jang, Bong-Gyu & Lee, Ho-Seok, 2008. "A first-passage-time model under regime-switching market environment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2617-2627, December.
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    9. Robert Elliott & Carlton-James Osakwe, 2006. "Option Pricing for Pure Jump Processes with Markov Switching Compensators," Finance and Stochastics, Springer, vol. 10(2), pages 250-275, April.
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    Cited by:

    1. Chao Xu & Yinghui Dong & Guojing Wang, 2019. "The pricing of defaultable bonds under a regime-switching jump-diffusion model with stochastic default barrier," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 48(9), pages 2185-2205, May.

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