Pricing of Discount Bonds with a Markov Switching Regime
AbstractWe 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.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 859.
Date of creation: Apr 2013
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Investment; Bond pricing; term structure; Markov switching regime; Vasicek model; CIR model; stochastic flows.;
Find related papers by 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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- Camilla LandÊn, 2000. "Bond pricing in a hidden Markov model of the short rate," Finance and Stochastics, Springer, vol. 4(4), pages 371-389.
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