Dynamic bond portfolio choice in a model with Gaussian diffusion regimes

Joao Liborio

The European Journal of Finance, 2005, vol. 11, issue 3, 259-270

Abstract: This paper studies bond prices, intertemporal consumption and portfolio choice in a simple two-factor continuous-time regime-switching term structure model. The real interest rate and the expected inflation are modelled as an “extended” Ornstein-Uhlenbeck process, whose mean and variance shift randomly within a high-low Markovian regime. The prices of nominal and indexed bonds, the nominal and real term premia and the consumption-portfolio choice of a typical risk-averse investor are studied in the case in which the regime is observed.

Keywords: Portfolio choice; regime-switching models; term structure (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1080/13518470500039287

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