Regime Switching and Bond Pricing
AbstractThis article proposes an overview of the usefulness of the regime switching approach for building various kinds of bond pricing models and of the roles played by the regimes in these models. Both default-free and defaultable bonds are considered. The regimes can be used to capture stochastic drifts and/or volatilities, to represent discrete target rates, to incorporate business cycles or crises, to introduce contagion, to reproduce zero lower bound spells, or to evaluate the impact of standard or nonstandard monetary policies. From a technical point of view, we stress the key role of Markov chains, Compound Autoregressive (Car) processes, Regime Switching Car processes and multihorizon Laplace transforms.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 456.
Length: 49 pages
Date of creation: 2013
Date of revision:
term structure; regime switching; affine models; car process; multi-horizon Laplace transform; contagion; default risk; monetary policy.;
Other versions of this item:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-FMK-2013-10-25 (Financial Markets)
- NEP-MAC-2013-10-25 (Macroeconomics)
- NEP-ORE-2013-10-25 (Operations Research)
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