A Semi-Markov Modulated Interest Rate Model
In this paper we propose a semi-Markov modulated model of interest rates. We assume that the switching process is a semi-Markov process with finite state space E and the modulated process is a diffusive process. We derive recursive equations for the higher order moments of the discount factor and we describe a Monte Carlo al- gorithm to execute simulations. The results are specialized to classical models as those by Vasicek, Hull and White and CIR with a semi-Markov modulation.
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- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
- Mamon, Rogemar S., 2002. "A time-varying Markov chain model of term structure," Statistics & Probability Letters, Elsevier, vol. 60(3), pages 309-312, December.
- John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005.
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- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
- Hunt, Julien & Devolder, Pierre, 2011. "Semi-Markov regime switching interest rate models and minimal entropy measure," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(21), pages 3767-3781. Full references (including those not matched with items on IDEAS)
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