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Regime Switching and Bond Pricing

  • Gouriéroux, C.
  • Monfort, A.
  • Pegoraro, F.
  • Renne, J-P.

This article proposes an overview of the usefulness of the regime switching approach for building various kinds of bond pricing models and of the roles played by the regimes in these models. Both default-free and defaultable bonds are considered. The regimes can be used to capture stochastic drifts and/or volatilities, to represent discrete target rates, to incorporate business cycles or crises, to introduce contagion, to reproduce zero lower bound spells, or to evaluate the impact of standard or nonstandard monetary policies. From a technical point of view, we stress the key role of Markov chains, Compound Autoregressive (Car) processes, Regime Switching Car processes and multihorizon Laplace transforms.

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Paper provided by Banque de France in its series Working papers with number 456.

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Length: 49 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bfr:banfra:456
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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