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Markov regime-switching in pricing equity-linked securities: An empirical study for losses in HSCEI-linked products

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  • Kim, Hongjoong
  • Park, Sungwon
  • Moon, Kyoung-Sook

Abstract

The risk analysis of equity-linked securities (ELS) has become increasingly important, particularly after the substantial losses associated with HSCEI-linked ELS in South Korea in 2024. In this study, we assess the expected price and risk measures of a representative step-down ELS linked to three indices: S&P 500, EURO STOXX 50, and HSCEI, using Markov regime-switching (MRS) models. Our empirical findings show that the MRS model captures long-term market behavior more effectively than constant covariance models based on implied or historical volatility. Furthermore, only the MRS model reveals elevated potential risks for the HSCEI index compared to the other indices.

Suggested Citation

  • Kim, Hongjoong & Park, Sungwon & Moon, Kyoung-Sook, 2025. "Markov regime-switching in pricing equity-linked securities: An empirical study for losses in HSCEI-linked products," Finance Research Letters, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finlet:v:76:y:2025:i:c:s154461232500193x
    DOI: 10.1016/j.frl.2025.106929
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    Keywords

    Equity linked securities; Markov regime switching; Risk analysis; HSCEI;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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