A regime-switching term structure model with observable state variables

The paper proposes in a regime-shift framework, an arbitrage-free term structure model based on the target and Fed Funds Rates. Empirical observations suggest that a three-state regime-shift environment associated with FOMC monetary actions is justified. Then, a closed-form solution for zero-coupon bonds is derived where regime-shift risk is priced. The solution is flexible enough to incorporate additional state variables.

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Year of publication:	2010
Authors:	Ferland, René ; Gauthier, Geneviève ; Lalancette, Simon
Published in:	Finance Research Letters. - Elsevier, ISSN 1544-6123. - Vol. 7.2010, 2, p. 103-109
Publisher:	Elsevier
Keywords:	C02 E43 G10 G12 Regime-switch Target rate Risk-neutral valuation Markov chains

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10008499379