Work

Valuation of Defaultable Corporate Bonds Under Regime Switching

Year: 2025

Type: article

Abstract: This study investigates the valuation of defaultable corporate bonds using a two-factor model of Markov-modulated stochastic volatility with double exponential jumps (2FMMSVDEJ). This model captures long- and short-term SV and asymmetrical jumps in the underlying asset value. Concurrently, the firm’s debt dynamics are governed by a Markov-modulated GBM (MMGBM) model to reflect state transitions. A dynamic measure change technique is employed to determine the pricing kernel, and the resulting credit spreads and default probabilities are analyzed.

Source: Mathematics

DOI: 10.3390/math13223628

Authors: Yu-Min Lian, Jun-Home Chen

Institutions: Fu Jen Catholic University, National Chin-Yi University of Technology

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $3,137

Funders: National Science and Technology Council, Ministry of Science and Technology, Taiwan, National Science and Technology Council