For this model we look at the bond pricing problem. In order to obtain more concrete results we introduce the notion of a semi-affine term structure and give sufficient conditions for the existence of such a term structure. For a special case, when the underlying process is a Markov chain with only two states, we obtain a closed form expression for bond prices.

Furthermore we consider the pricing problem when the modulating process can not be directly observed. It turns out that pricing in this context may be viewed as a filtering problem.

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Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 4 (2000)
Issue (Month): 4 ()
Pages: 371-389
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Handle: RePEc:spr:finsto:v:4:y:2000:i:4:p:371-389

Note: received: November 1998; final version received: June 1999
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Related research

Keywords: Bond market; term structure of interest rates; regime shifts; hidden Markov model;

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

1. Driffill, John & Kenc, Turalay & Sola, Martin & Spagnolo, Fabio, 2004. "On Model Selection and Markov Switching: A Empirical Examination of Term Structure Models with Regime Shifts," CEPR Discussion Papers 4165, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
   Other versions:
   • John Driffill & Turalay Kenc & Martin Sola & Fabio Spagnolo, 2008. "On Model Selection and Markov-Switching: An Empirical Examination of Term Structure Models with Regime Shifts," Department of Economics Working Papers 2008-04, Universidad Torcuato Di Tella. [Downloadable!]
2. Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
   Other versions:
   • Ang, Andrew & Bekaert, Geert, 2004. "The Term Structure of Real Rates and Expected Inflation," CEPR Discussion Papers 4518, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
   • Andrew Ang & Geert Bekaert & Min Wei, 2007. "The Term Structure of Real Rates and Expected Inflation," NBER Working Papers 12930, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
   • Andrew Ang & Geert Bekaert & Min Wei, 2008. "The Term Structure of Real Rates and Expected Inflation," Journal of Finance, American Finance Association, vol. 63(2), pages 797-849, 04. [Downloadable!] (restricted)
3. Qiang Dai & Kenneth J. Singleton & Wei Yang, 2004. "Regime shifts in a dynamic term structure model of U.S. Treasury bond yields," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
4. Eckhard Platen & Wolfgang Runggaldier, 2002. "A Benchmark Approach to Filtering in Finance," Research Paper Series 77, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
   Other versions:
   • Eckhard Platen & Wolfgang Runggaldier, 2004. "A Benchmark Approach to Filtering in Finance," Asia-Pacific Financial Markets, Springer, vol. 11(1), pages 79-105, March. [Downloadable!] (restricted)
5. Eckhard Platen & Wolfgang Runggaldier, 2007. "A Benchmark Approach to Portfolio Optimization under Partial Information," Asia-Pacific Financial Markets, Springer, vol. 14(1), pages 25-43, March. [Downloadable!] (restricted)
   Other versions:
   • Eckhard Platen & Wolfgang Runggaldier, 2007. "A Benchmark Approach to Portfolio Optimization under Partial Information," Research Paper Series 191, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
6. Hoi Wong & Tsz Wong, 2007. "Reduced-form Models with Regime Switching: An Empirical Analysis for Corporate Bonds," Asia-Pacific Financial Markets, Springer, vol. 14(3), pages 229-253, September. [Downloadable!] (restricted)

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