Related papers: Markov switching quadratic term structure models
We consider a financial market in which the short rate is modeled by a continuous time Markov chain (CTMC) with a finite state space. In this setting, we show how to price any financial derivative whose payoff is a function of the state of…
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.…
No-arbitrage models of term structure have the feature that the return on zero-coupon bonds is the sum of the short rate and the product of volatility and market price of risk. Well known models restrict the behavior of the market price of…
In the regime switching extension of Black-Scholes-Merton model of asset price dynamics, one assumes that the volatility coefficient evolves as a hidden pure jump process. Under the assumption of Markov regime switching, we have considered…
We develop a model for credit rating migration that accounts for the impact of economic state fluctuations on default probabilities. The joint process for the economic state and the rating is modelled as a time-homogeneous Markov chain.…
We consider a continuous-time financial market with an asset whose price is modeled by a linear stochastic differential equation with drift and volatility switching driven by a uniformly ergodic jump Markov process with a countable state…
Regime-switching models, in particular Hidden Markov Models (HMMs) where the switching is driven by an unobservable Markov chain, are widely-used in financial applications, due to their tractability and good econometric properties. In this…
The purpose of the present paper is to incorporate stochastic interest rates into a matrix-approach to multi-state life insurance, where formulas for reserves, moments of future payments and equivalence premiums can be obtained as explicit…
This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing…
In a continuous time stochastic economy, this paper considers the problem of consumption and investment in a financial market in which the representative investor exhibits a change in the discount rate. The investment opportunities are a…
This paper considers the problem of consumption and investment in a financial market within a continuous time stochastic economy. The investor exhibits a change in the discount rate. The investment opportunities are a stock and a riskless…
We consider an HJM model setting for Markov-chain modulated forward rates. The underlying Markov chain is assumed to induce regime switches on the forward curve dynamics. Our primary focus is on the interest rate and energy futures markets.…
We consider a risk-sensitive optimization of consumption-utility on infinite time horizon where the one-period investment gain depends on an underlying economic state whose evolution over time is assumed to be described by a discrete-time,…
The shortcomings of the popular Black-Scholes-Merton (BSM) model have led to models which could more accurately model the behavior of the underlying assets in energy markets, particularly in electricity and future oil prices. In this paper…
Explicitly taking into account the risk incurred when borrowing at a shorter tenor versus lending at a longer tenor ("roll-over risk"), we construct a stochastic model framework for the term structure of interest rates in which a frequency…
This paper studies pricing derivatives in an age-dependent semi-Markov modulated market. We consider a financial market where the asset price dynamics follow a regime switching geometric Brownian motion model in which the coefficients…
Quantum computers are not yet up to the task of providing computational advantages for practical stochastic diffusion models commonly used by financial analysts. In this paper we introduce a class of stochastic processes that are both…
This project attempts to address the problem of asset pricing in a financial market, where the interest rates and volatilities exhibit regime switching. This is an extension of the Black-Scholes model. Studies of Markov-modulated regime…
Markov switching models (MSMs) are probabilistic models that employ multiple sets of parameters to describe different dynamic regimes that a time series may exhibit at different periods of time. The switching mechanism between regimes is…
In this paper we present elementary computations for some Markov modulated counting processes, also called counting processes with regime switching. Regime switching has become an increasingly popular concept in many branches of science. In…