Contagion and bond pricing: The case of the ASEAN region

Ilyes Abid, Abderrazak Dhaoui, Stéphane Goutte and Khaled Guesmi

Research in International Business and Finance, 2019, vol. 47, issue C, 371-385

Abstract: In this paper, we obtain explicit numerical formulas to price the defaultable bonds prices of firms. The possible default event of the firms happen in random time and not necessary in uniform time spread. For this purpose, we develop a Markov regime-switching Copula model that allows us to well-capture the economic behavior in some ASEAN region countries. The first regime represents the evidence that is used to support the standard economy. The second regime represents the crisis state. Based on various specifications, we obtain an explicit formula to evaluate the conditional Laplace transform of a regime switching Cox Ingersoll Ross model using the semi-affine property of this model. Our numerical results show strong evidence for increasing volatility parameter in crisis state, suggesting more possibility of contagion. Furthermore, statistically significant differences in terms of volatility of default across countries are reported. Indonesia and Malaysia exhibit particularly higher volatility than other markets, especially in the crisis state.

Keywords: Defaultable bond; Regime switching; ASEAN region; Credit rating; Markov copula (search for similar items in EconPapers)
JEL-codes: C22 C58 F31 F47 G01 O11 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Contagion and bond pricing: The case of the ASEAN region (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:47:y:2019:i:c:p:371-385

DOI: 10.1016/j.ribaf.2018.08.010

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