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

Bo, Lijun; Tang, Dan; Wang, Yongjin; Yang, Xuewei

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

Quantitative Finance, Forthcoming

18 Pages Posted: 4 May 2010 Last revised: 14 Jun 2017

See all articles by Lijun Bo

Lijun Bo

University of Science and Technology of China (USTC)

Dan Tang

Nankai University - School of Mathematical Sciences; Nankai University - TEDA Institute of Computational Finance

Xuewei Yang

Nanjing University - School of Management and Engineering; Nanjing University - Institute of New Finance

Date Written: April 30, 2010

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

Suggested Citation: Suggested Citation

Bo, Lijun and Tang, Dan and Wang, Yongjin and Yang, Xuewei, On the Conditional Default Probability in a Regulated Market: A Structural Approach (April 30, 2010). Quantitative Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1598566