Pricing of discount bonds with a Markov switching regime

DOI10.1007/S10436-013-0244-3MaRDI QIDQ481375zbMATH OpenOpenAlexFDO

Authors Robert J. Elliott, Katsumasa Nishide

Publication date 12 December 2014

Published in Annals of Finance (Search for Journal in Brave)

Full work available at URL http://www.kier.kyoto-u.ac.jp/DP/DP859.pdf

zbMATH Keywords

bond pricingCIR modelMarkov switching regimestochastic flowterm structure

Mathematics Subject Classification ID

Continuous-time Markov processes on discrete state spaces (60J27) Derivative securities (option pricing, hedging, etc.) (91G20) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Review text

The authors obtain the price of discount bonds when the mean-reverting level of the CIR-type short rate follows a Markov chain. The pricing formula includes a solution of a simple linear matrix ODE, which can be solved numerically. The model presented in the paper can capture economic cycles observed in the economy, and the methodology is applicable to the pricing of CDS and other derivatives.

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Cites work

• A simple regime switching term structure model
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• An interest rate model with a Markovian mean reverting level
• Bond pricing in a hidden Markov model of the short rate
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• SOLUTION OF THE EXTENDED CIR TERM STRUCTURE AND BOND OPTION VALUATION
• Stochastic flows and the forward measure
• Transform Analysis and Asset Pricing for Affine Jump-diffusions

Cited in

(17)

• Bond pricing formulas for Markov-modulated affine term structure models
• Wellposedness of viscosity solutions to weakly coupled HJB equations under Hölder \textit{continuous conditions}
• Saddlepoint approximations to option price in a regime-switching model
• On Markov‐modulated Exponential‐affine Bond Price Formulae
• The effects of different parameterizations of Markov-switching in a CIR model of bond pricing
• A simple novel approach to valuing risky zero coupon bond in a Markov regime switching economy
• HARA utility maximization in a Markov-switching bond-stock market
• scientific article; zbMATH DE number 2168902 (Why is no real title available?)
• A unified option pricing model with Markov regime-switching double stochastic volatility, stochastic interest rate and jumps
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• Option valuation under double exponential jump with stochastic intensity, stochastic interest rates and Markov regime-switching stochastic volatility
• A Markov regime-switching marked point process for short-rate analysis with credit risk
• Forward starting options pricing under a regime-switching jump-diffusion model with Wishart stochastic volatility and stochastic interest rate
• Options pricing with Markov regime switching Heston volatility Hull-White interest rates and stochastic intensity
• Pricing vulnerable options under a Markov modulated jump-diffusion model with stochastic volatility and stochastic jump intensity
• Optimal investment in multidimensional Markov-modulated affine models
• Bond pricing under a Markovian regime-switching jump-augmented vasicek model via stochastic flows

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