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The Term Structure of Interest Rates under Regime Shifts and Jumps

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  • Shu Wu

    (Department of Economics, The University of Kansas)

  • Yong Zeng
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Abstract

This paper develops a tractable dynamic term structure models under jump-diffusion and regime shifts with time varying transition probabilities. The model allows for regime-dependent jumps while both jump risk and regime-switching risk are priced. Closed form solution for the term structure is obtained for an ane-type model under loglinear approximation.

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File URL: http://www.ku.edu/~bgju/2005Papers/200520.pdf
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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200520.

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Length: 10 pages
Date of creation: Oct 2005
Date of revision: Oct 2005
Handle: RePEc:kan:wpaper:200520

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Keywords: Term Structure; Regime Switching; Jump Diffusion; Marked Point Process;

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References

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  1. Yong Zeng & Shu Wu, 2004. "A General Equilibrium Model of the Term Structure of Interest Rates under Regime-switching Risk," Econometric Society 2004 North American Summer Meetings, Econometric Society 304, Econometric Society.
  2. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  3. Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 1997-2043, October.
  4. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 405-443, 02.
  5. Das, Sanjiv R., 2002. "The surprise element: jumps in interest rates," Journal of Econometrics, Elsevier, Elsevier, vol. 106(1), pages 27-65, January.
  6. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 1943-1978, October.
  7. Ahn, Chang Mo & Thompson, Howard E, 1988. " Jump-Diffusion Processes and the Term Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 43(1), pages 155-74, March.
  8. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(4), pages 379-406.
  9. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(3), pages 381-408, June.
  10. Camilla LandÊn, 2000. "Bond pricing in a hidden Markov model of the short rate," Finance and Stochastics, Springer, Springer, vol. 4(4), pages 371-389.
  11. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(2), pages 311-344, April.
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Cited by:
  1. El-khatib, Youssef & Hatemi-J, Abdulnasser, 2013. "On option pricing in illiquid markets with random jumps," MPRA Paper 45172, University Library of Munich, Germany.
  2. Ferland, René & Gauthier, Geneviève & Lalancette, Simon, 2010. "A regime-switching term structure model with observable state variables," Finance Research Letters, Elsevier, Elsevier, vol. 7(2), pages 103-109, June.
  3. Hunt, Julien & Devolder, Pierre, 2011. "Semi-Markov regime switching interest rate models and minimal entropy measure," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 390(21), pages 3767-3781.
  4. John Driffill & Martin Sola & Turalay Kenc, 2009. "Real Options with Priced Regime-Switching Risk," Department of Economics Working Papers, Universidad Torcuato Di Tella 2009-09, Universidad Torcuato Di Tella.

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