Structural Pricing of CoCos and Deposit Insurance with Regime Switching and Jumps

In this article, we develop a semi-analytical closed-form solution for a structural model that combines jump and regime switching risk. We use an Esscher transform that is applicable to regime switching double exponential jump diffusion to move from the historical world to the risk-neutral world. Further, we define and implement a matrix Wiener-Hopf factorization associated with the latter process, allowing us to price the various components of balance sheet. We illustrate the model with a study of a bank that issues contingent convertible bonds (CoCos). Thus, we obtain valuation formulas for the bank’s equity, debt, deposits, CoCos, and deposit insurance. We also show in an illustration the respective effects of the jump risk and of regime switching on the values of all of a bank’s balance sheet components.