Modeling of Contingent Capital Under a Double Exponential JumpDiffusion Model with Switching Regime

Yıl 2022, , 36 - 54, 14.12.2022

Ons Trıkı Fathi Abıd

https://doi.org/10.55549/epess.1222723

Öz

This paper discusses a theoretical explanation that relies on investment within the framework of a
regime-switching structural model whose investment cost is financed by equity and CoCos. The unexpected
return of the project is governed by a continuous and temporal Markov chain. Explicit solutions have been
proposed under a regime-switching structural model when the value of the cash flows generated by the firm
follows a double-exponential step-distribution diffusion process. The equilibrium price theory under the jump
diffusion model was developed using the structural model introduced by Leland (1994) and later extended by
Kou (2002) and Chen and Kou (2009). The study focused on the influence of contingent convertibles on
investment and financing policies and the inefficiencies related to debt overhang and asset substitution in the
presence of an investment option

Anahtar Kelimeler

Contingent capital, Jump-diffusion model, Credit risk, Real option