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Jump-telegraph models for the short rate: pricing and convexity adjustments of zero coupon bonds

Oscar Lopez, Gerardo E. Oleaga and Alejandra Sanchez

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Abstract: In this article, we consider a Markov-modulated model with jumps for short rate dynamics. We obtain closed formulas for the term structure and forward rates using the properties of the jump-telegraph process and the expectation hypothesis. The results are compared with the numerical solution of the corresponding partial differential equation.

Date: 2019-01
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Handle: RePEc:arx:papers:1901.02995