Abstract
We consider a Markov switching regime and price a discount bond using a CIR-type short rate model. 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 in the price and term structure.
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Notes
It is worth mentioning that Landén (2000) considers a more general setting and so her PDE system holds for more cases than ours.
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Acknowledgments
The first author acknowledges the supports of Australian Research Council and the SSHRC. The second author acknowledges the financial support of the Japanese Ministry of Education, Culture, Sports, Science and Technology (MEXT) Grand in Aid for Scientific Research (B) #23310098, (B) #25245046, and (C) #23530362. This study is also supported in part by the 2012 Project Research at KIER of Kyoto University as the Joint Usage and Research Center.
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Elliott, R.J., Nishide, K. Pricing of discount bonds with a Markov switching regime. Ann Finance 10, 509–522 (2014). https://doi.org/10.1007/s10436-013-0244-3
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DOI: https://doi.org/10.1007/s10436-013-0244-3