A simple regime switching term structure model

We extend the short rate model of Vasicek (1977) to include jumps in the local mean. Conditions ensuring existence of a unique equivalent martingale measure are given, implying that the model is arbitrage-free and complete. We develop efficient numerical methods for computation of zero coupon bond prices, illustrate how the model is easily calibrated to market data and show how other interest rate derivatives can be priced.

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Year of publication:	2000-08-11
Authors:	Hansen, Asbjørn T. ; Poulsen, Rolf
Published in:	Finance and Stochastics. - Springer. - Vol. 4.2000, 4, p. 409-429
Publisher:	Springer
Subject:	Regime switching \| term structure of interest rates \| numerical methods \| option pricing

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Extent:	application/pdf
Type of publication:	Article
Notes:	received: March 1998; final version received: November 1999
Classification:	C15 - Statistical Simulation Methods; Monte Carlo Methods ; C63 - Computational Techniques ; E43 - Determination of Interest Rates; Term Structure Interest Rates ; G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005166867