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Regime Switching and Bond Pricing

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  • Christian Gouriéroux

    ()
    (CREST and Université de Toronto)

  • Alain Monfort

    ()
    (CREST et Banque de France)

  • Fulvio Pegoraro

    ()
    (Banque de France)

  • Jean-Paul Renne

    ()
    (Banque de France)

Abstract

This paper 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 non-standard 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 multi-horizon Laplace transforms

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Bibliographic Info

Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2013-48.

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Length: 52
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:crs:wpaper:2013-48

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Related research

Keywords: Term Structure; Regime Switching; Affine Models; Car Process; Multi-horizon Laplace Transform; Contagion; Default Risk; Monetary Policy;

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