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Pricing of Discount Bonds with a Markov Switching Regime　

Author

Listed:
  • Robert J. Elliott

    (School of Mathematics, University of Adelaide, Center for Applied Financial Studies, University of South Australia, Haskayne School of Business, University of Calgary)

  • Katsumasa Nishide

    (Department of Economics, Yokohama National University)

Abstract

We consider a Markov switching regime and price a discount bond using two popular models for the short rate, the Vasicek- and CIR-dynamics. In both cases, an explicit formula is obtained for the bond price which includes the solution of a matrix ODE. Our model is easy to calculate and captures the effect of regime uncertainty on the price and the term structure.

Suggested Citation

  • Robert J. Elliott & Katsumasa Nishide, 2013. "Pricing of Discount Bonds with a Markov Switching Regime　," KIER Working Papers 859, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:859
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP859.pdf
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    References listed on IDEAS

    as
    1. Camilla LandÊn, 2000. "Bond pricing in a hidden Markov model of the short rate," Finance and Stochastics, Springer, vol. 4(4), pages 371-389.
    2. Yoosef Maghsoodi, 1996. "Solution Of The Extended Cir Term Structure And Bond Option Valuation," Mathematical Finance, Wiley Blackwell, vol. 6(1), pages 89-109, January.
    3. Robert J. Elliott & John van der Hoek, 2001. "Stochastic flows and the forward measure," Finance and Stochastics, Springer, vol. 5(4), pages 511-525.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. M. Escobar & D. Neykova & R. Zagst, 2017. "HARA utility maximization in a Markov-switching bond–stock market," Quantitative Finance, Taylor & Francis Journals, vol. 17(11), pages 1715-1733, November.

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    More about this item

    Keywords

    Investment; Bond pricing; term structure; Markov switching regime; Vasicek model; CIR model; stochastic flows.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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