Pricing bond options under a Markovian regime-switching Hull–White model

Yang Shen and Tak Kuen Siu

Economic Modelling, 2013, vol. 30, issue C, 933-940

Abstract: In this paper, we investigate the valuation of bond options under a Markovian regime-switching Hull–White model, where both the mean-reverting level and the volatility of the interest rate are modulated by a continuous-time, finite-state Markov chain. Using techniques of measure changes and the inverse Fourier transform, we obtain an integral representation for the pricing formula of a standard European option on a zero-coupon bond. Numerical results for the prices and implied volatilities of bond options arising in our model are given in a two-regime case.

Keywords: Regime-switching; Hull–White model; Forward measures; Bond options; Inverse Fourier transform (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:30:y:2013:i:c:p:933-940

DOI: 10.1016/j.econmod.2012.09.041

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