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Dynamic bond portfolio choice in a model with Gaussian diffusion regimes

  • Joao Liborio
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    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.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039287
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    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 11 (2005)
    Issue (Month): 3 ()
    Pages: 259-270

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    Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:259-270
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    1. David, Alexander, 1997. "Fluctuating Confidence in Stock Markets: Implications for Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 427-462, December.
    2. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-25, February.
    3. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    4. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    5. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
    6. Martin Evans, 2002. "Real Risk, Inflation Risk, and the Term Structure," Working Papers gueconwpa~02-02-10, Georgetown University, Department of Economics.
    7. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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