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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- Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
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- 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.
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