A semi-Markov regime switching extension of the Vasicek model
(2011)
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- Abstract
- We briefly recall some essential notions on interest rates and zero-coupon bonds. We then de ne a sound mathematical framework to study a model of the short rate in which the parameters are allowed to vary according to an underlying semi-Markov process. We give some properties of the short rate in our model. We follow by studying the notion of risk-neutral martingale measures in this context. Finally, we discuss the pricing of interest-rate derivatives. In particular, we show that the price of a zero-coupon bond has to satisfy a system of integro-differential equations that is influenced both by the market price of risk and by the market price of regime switch risk.
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Hunt, J., & Devolder, P. (2011). A semi-Markov regime switching extension of the Vasicek model. https://hdl.handle.net/2078.5/208939