Valuation of Defaultable Corporate Bonds Under Regime Switching

Yu-Min Lian and Jun-Home Chen ()
Additional contact information
Yu-Min Lian: Department of Business Administration, Fu Jen Catholic University, No. 510, Zhongzheng Rd., Xinzhuang Dist., New Taipei City 242062, Taiwan
Jun-Home Chen: Department of Business Administration, National Chin-Yi University of Technology, No. 57, Sec. 2, Zhongshan Rd., Taiping Dist., Taichung 411030, Taiwan

Mathematics, 2025, vol. 13, issue 22, 1-16

Abstract: This study investigates the valuation of defaultable corporate bonds using a two-factor model of Markov-modulated stochastic volatility with double exponential jumps (2FMMSVDEJ). This model captures long- and short-term SV and asymmetrical jumps in the underlying asset value. Concurrently, the firm’s debt dynamics are governed by a Markov-modulated GBM (MMGBM) model to reflect state transitions. A dynamic measure change technique is employed to determine the pricing kernel, and the resulting credit spreads and default probabilities are analyzed.

Keywords: defaultable corporate bond; two-factor Markov-modulated stochastic volatility model with double exponential jumps; asymmetrical jump; Markov-modulated geometric Brownian motion; dynamic measure change (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7390/13/22/3628/pdf (application/pdf)
https://www.mdpi.com/2227-7390/13/22/3628/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jmathe:v:13:y:2025:i:22:p:3628-:d:1793096

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().