The pricing of defaultable bonds under a regime-switching jump-diffusion model with stochastic default barrier

Chao Xu, Yinghui Dong and Guojing Wang

Communications in Statistics - Theory and Methods, 2019, vol. 48, issue 9, 2185-2205

Abstract: In this paper, we investigate the price for the zero-coupon defaultable bond under a structural form credit risk with regime switching. We model the value of a firm and the default threshold by two dependent regime-switching jump-diffusion processes, in which the Markov chain represents the states of an economy. The price is associated with the Laplace transform of the first passage time and the expected discounted ratio of the firm value to the default threshold at default. Closed-form results used for calculating the price are derived when the jump sizes follow a regime-switching double exponential distribution. We present some numerical results for the price of the zero-coupon defaultable bond via Gaver-Stehfest algorithm.

Date: 2019
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DOI: 10.1080/03610926.2018.1459715

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