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Dynamic bond portfolio choice in a model with Gaussian diffusion regimes

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  • Joao Liborio

Abstract

This paper studies bond prices, intertemporal consumption and portfolio choice in a simple two-factor continuous-time regime-switching term structure model. The real interest rate and the expected inflation are modelled as an “extended” Ornstein-Uhlenbeck process, whose mean and variance shift randomly within a high-low Markovian regime. The prices of nominal and indexed bonds, the nominal and real term premia and the consumption-portfolio choice of a typical risk-averse investor are studied in the case in which the regime is observed.

Suggested Citation

  • Joao Liborio, 2005. "Dynamic bond portfolio choice in a model with Gaussian diffusion regimes," The European Journal of Finance, Taylor & Francis Journals, vol. 11(3), pages 259-270.
    • Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:259-270
    DOI: 10.1080/13518470500039287
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    References listed on IDEAS

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