On the default probability in a regime-switching regulated market (Q2445481): Difference between revisions

This paper deals with the default probability in a regime-switching regulated market. The market price dynamics is described as a Markov-modulated reflected stochastic differential equation. The authors use the first passage time to model the default time of the regulated market. The explicit Laplace transform formulas for the first passage times are derived by solving a system of interacting ordinary differential equations. Two solvable examples for such a system of interacting stochastic differential equations are considered. One is the regime-switching reflected Brownian motion with two-sided barriers, the other is the regime-switching reflected geometric Brownian motion with two-sided barriers. Their Laplace transforms of the first passage times are explicitly derived. Finally, the distribution of the default time is computed by numerically inverting the Laplace transform of the first passage time. A so-called ``GWR'' algorithm is applied to numerically calculate the Laplace inversion.