Finite-dimensional Realizations of Regime-switching HJM Models
AbstractThis paper studies Heath-Jarrow-Morton-type models with regime-switching stochastic volatility. In this setting the forward rate volatility is allowed to depend on the current forward rate curve as well as on a continuous time Markov chain y with finitely many states. Employing the framework developed by Bjork and Svensson we find necessary and sufficient conditions on the volatility guaranteeing the representation of the forward rate process by a finite-dimensional Markovian state space model. These conditions allow us to investigate regime-switching generalizations of some well-known models such as those by Ho-Lee, Hull-White, and Cox-Ingersoll-Ross.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 15 (2008)
Issue (Month): 4 ()
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