Structural Pricing of CoCos and Deposit Insurance with Regime Switching and Jumps

Olivier Courtois () and Xiaoshan Su ()
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Olivier Courtois: Emlyon Business School
Xiaoshan Su: Emlyon Business School

Asia-Pacific Financial Markets, 2020, vol. 27, issue 4, No 2, 477-520

Abstract: Abstract In this article, we develop a semi-analytical solution for a structural model that combines jump and regime switching risk. We use an Esscher transform that is applicable to regime switching double exponential jump diffusion to move from the historical world to the risk-neutral world. Further, we define and implement a matrix Wiener–Hopf factorization associated with the latter process, allowing us to price the various components of balance sheet. We illustrate the model with a study of a bank that issues contingent convertible bonds (CoCos). Thus, we obtain valuation formulas for the bank’s equity, debt, deposits, CoCos, and deposit insurance. We also show in an illustration the respective effects of the jump risk and of regime switching on the values of all of a bank’s balance sheet components.

Keywords: Structural model; Regime switching; Jump-diffusion; First passage time; Matrix Wiener–Hopf factorization; Esscher transform; CoCos; Deposit insurance (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10690-020-09304-6

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