A simple regime switching term structure model

DOI10.1007/PL00013523MaRDI QIDQ5926474zbMATH OpenOpenAlexFDO

Authors Asbjørn Hansen, Rolf Poulsen

Publication date 1 March 2001

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/pl00013523

zbMATH Keywords

numerical methodsoption pricingregime switchingterm structure of interest rates

Mathematics Subject Classification ID

Signal detection and filtering (aspects of stochastic processes) (60G35) Extrapolation to the limit, deferred corrections (65B05) Monte Carlo methods (65C05)

Review text

Many papers have extended the classical mean reversion interest rate models of \textit{O. Vasicek} [J. Financial Econ. 5, 177-188 (1977)] as well as their parametric generalization. Typically one or more additional sources of Wiener noise are introduced through the volatility parameter or through the level towards which the short rate reverts. The former approach introduces stochastic volatility interest rate models. The authors extend the short rate Vasicek model to include jumps in the local mean. They choose the computational tractable Vasicek model as their basis model and augment it by letting the level to which the process reverts change. These changes are governed by arrivals from a Poisson process. This means that jumps are presented in the drift of the short rate process. Conditions ensuring existence of a unique equivalent martingale measure are given, implying that the model is arbitrage-free and complete. Efficient numerical methods for computation of zero coupon bond prices are developed, and how the model is easily calibrated to market data is illustrated and how other interest rate derivatives can be priced are shown.

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Cited in

(22)

• Multi-factor affine term structure model with single regime shift: Real term structure under zero interest rate
• On a general class of one-factor models for the term structure of interest rates
• The surprise element: Jumps in interest rates.
• A pure-jump mean-reverting short rate model
• A lattice-based approach to option and bond valuation under mean-reverting regime-switching diffusion processes
• On the estimation of regime-switching Lévy models
• Regime switching term structure model under partial information
• SELF EXCITING THRESHOLD INTEREST RATES MODELS
• A stochastic monetary policy interest rate model
• Option-based risk management of a bond portfolio under regime switching interest rates
• The effects of different parameterizations of Markov-switching in a CIR model of bond pricing
• Regime-switching univariate diffusion models of the short-term interest rate
• An interest-rate model with regime-switching mean-reversion level
• A tractable market model with jumps for pricing short-term interest rate derivatives
• An interest rate model with a Markovian mean reverting level
• Stochastic volatility Gaussian Heath-Jarrow-Morton models
• Pricing of discount bonds with a Markov switching regime
• On a continuous time stock price model with regime switching, delay, and threshold
• A positive interest rate model with sticky barrier
• PARAMETER ESTIMATION FOR A REGIME-SWITCHING MEAN-REVERTING MODEL WITH JUMPS
• A GENERAL EQUILIBRIUM MODEL OF THE TERM STRUCTURE OF INTEREST RATES UNDER REGIME-SWITCHING RISK
• Development of computational algorithms for pricing European bond options under the influence of macro-economic conditions

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