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

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  • Chao Xu
  • Yinghui Dong
  • Guojing Wang

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.

Suggested Citation

  • Chao Xu & Yinghui Dong & Guojing Wang, 2019. "The pricing of defaultable bonds under a regime-switching jump-diffusion model with stochastic default barrier," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 48(9), pages 2185-2205, May.
    • Handle: RePEc:taf:lstaxx:v:48:y:2019:i:9:p:2185-2205
    DOI: 10.1080/03610926.2018.1459715
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