On the Default Probability in a Regime-Switching Regulated Market

Lijun Bo, Yongjin Wang and Xuewei Yang ()
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Lijun Bo: Xidian University
Yongjin Wang: Nankai University
Xuewei Yang: Nanjing University

Methodology and Computing in Applied Probability, 2014, vol. 16, issue 1, 101-113

Abstract: 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.

Keywords: Default time; Laplace transform; Regulated (controlled) market; Regime-switching; Reflected stochastic differential equation; 60H10; 44A10; 91B02 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11009-012-9301-z

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