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On the Default Probability in a Regime-Switching Regulated Market

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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.

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Authors and Affiliations

  1. Department of Mathematics, Xidian University, Xi’an, 710071, People’s Republic of China

    Lijun Bo

  2. School of Business, Nankai University, Tianjin, 300071, China

    Yongjin Wang

  3. School of Management and Engineering, Nanjing University, Nanjing, 210093, China

    Xuewei Yang

Authors
  1. Lijun Bo
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  2. Yongjin Wang
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  3. Xuewei Yang
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Correspondence to Xuewei Yang.

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Bo, L., Wang, Y. & Yang, X. On the Default Probability in a Regime-Switching Regulated Market. Methodol Comput Appl Probab 16, 101–113 (2014). https://doi.org/10.1007/s11009-012-9301-z

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  • DOI: https://doi.org/10.1007/s11009-012-9301-z

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