Pricing of Discount Bonds with a Markov Switching Regime　

Robert Elliott () and Katsumasa Nishide
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Robert Elliott: School of Mathematics, University of Adelaide, Center for Applied Financial Studies, University of South Australia, Haskayne School of Business, University of Calgary

No 859, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We consider a Markov switching regime and price a discount bond using two popular models for the short rate, the Vasicek- and CIR-dynamics. In both cases, an explicit formula is obtained for the bond price which includes the solution of a matrix ODE. Our model is easy to calculate and captures the effect of regime uncertainty on the price and the term structure.

Keywords: Investment; Bond pricing, term structure, Markov switching regime, Vasicek model, CIR model, stochastic flows. (search for similar items in EconPapers)
JEL-codes: E32 G12 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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