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Regime Switching and Bond Pricing

Christian Gourieroux, Alain Monfort (), Fulvio Pegoraro () and Jean-Paul Renne

Journal of Financial Econometrics, 2014, vol. 12, issue 2, 237-277

Abstract: 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. (JEL: E43, G12)

Date: 2014
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Working Paper: Regime Switching and Bond Pricing (2013) Downloads
Working Paper: Regime Switching and Bond Pricing (2013) Downloads
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