We propose a hybrid structural Merton default model with regime changes to explain and forecast the joint dynamics of the stock price and the credit default spread (CDS) on the company debt. We present estimation of the model using filtering approach and constructing confidence bounds for model parameters using appropriate bootstrap method. For the first time, we introduce the Arrow-Debreu state prices for valuation of defaultable securities in the presence of regime-dependent recovery rates and risk-premiums. Using Arrow-Debreu prices, we develop analytical solutions for evaluation of defaultable securities (up to the inversion of Laplace transform). We present strong empirical evidence for the proposed model.