A Markov Regime-Switching Marked Point Process for Short-Rate Analysis with Credit Risk

Tak Kuen Siu

International Journal of Stochastic Analysis, 2010, vol. 2010, 1-18

Abstract:

We investigate a Markov, regime-switching, marked point process for the short-term interest rate in a market. The intensity of the marked point process is a bounded, predictable process and is modulated by two observable factors. One is an economic factor described by a diffusion process, and another one is described by a Markov chain. The states of the chain are interpreted as different rating categories of corporate credit ratings issued by rating agencies. We consider a general pricing kernel which can explicitly price economic, market, and credit risks. It is shown that the price of a pure discount bond satisfies a system of coupled partial differential-integral equations under a risk-adjusted measure.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnijsa:870516

DOI: 10.1155/2010/870516

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