Investigation of Defaulted Bond Recovery Rates in a Regime-Switching Model

This paper studies the recovery rates of the defaulted bond in a regime-switching model based on Mason´s theory. Regard returns during default as a perpetual American call option which has a low face value and exercised according to the business condition by the creditor. We obtain the recovery rates of the defaulted bond by discussing the optimal stopping time of the American call option, which is a free boundary problem for ordinary differential equations. Moreover, the present paper gives numerical results, several related properties of the solution and a meaningful theorem.