Valuation of Defaultable Corporate Bonds Under Regime Switching

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.