A First-Passage-Time Model Under Regime-Switching Market Environment

In this paper, we suggest a first-passage-time model which can explain default probability and default correlation dynamics under stochastic market environment. We add a Markov regime-switching market condition to a first-passage-time model of Zhou (2001). Using this model, we try to explain various relationship between default probability, default correlation, and market condition. We also suggest a valuation method for credit default swap (CDS) with(or without) counterparty default risk (CDR) and basket default swap under this model