On the Conditional Default Probability in a Regulated Market: A Structural Approach

Abstract

In this article, we consider a regulated market and explore the default events. By using a so-called reflected Ornstein-Uhlenbeck process with two-sided barriers to formulate the price dynamics, we derive the expression on the conditional default probability. In the cases of single observation and multiple observations, the conditional default probabilities are explicitly expressed in terms of the inverse Laplace transforms. Finally, we present a numerical simulation associated with the conditional default probability.

Keywords: Conditional default probability, reflected Ornstein-Uhlenbeck process, default risk, inverse Laplace transform

JEL Classification: G10, G14