Markov regime-switching in pricing equity-linked securities: An empirical study for losses in HSCEI-linked products

Hongjoong Kim, Sungwon Park and Kyoung-Sook Moon

Finance Research Letters, 2025, vol. 76, issue C

Abstract: The risk analysis of equity-linked securities (ELS) has become increasingly important, particularly after the substantial losses associated with HSCEI-linked ELS in South Korea in 2024. In this study, we assess the expected price and risk measures of a representative step-down ELS linked to three indices: S&P 500, EURO STOXX 50, and HSCEI, using Markov regime-switching (MRS) models. Our empirical findings show that the MRS model captures long-term market behavior more effectively than constant covariance models based on implied or historical volatility. Furthermore, only the MRS model reveals elevated potential risks for the HSCEI index compared to the other indices.

Keywords: Equity linked securities; Markov regime switching; Risk analysis; HSCEI (search for similar items in EconPapers)
JEL-codes: C32 C58 G17 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:76:y:2025:i:c:s154461232500193x

DOI: 10.1016/j.frl.2025.106929

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