A Markov regime-switching marked point process for short-rate analysis with credit risk

Tak Kuen Siu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)
13 Downloads (Pure)

Abstract

We investigate a Markov, regime-switching, marked point process for the short-term interest rate in a market. The intensity of the marked point process is a bounded, predictable process and is modulated by two observable factors. One is an economic factor described by a diffusion process, and another one is described by a Markov chain. The states of the chain are interpreted as different rating categories of corporate credit ratings issued by rating agencies. We consider a general pricing kernel which can explicitly price economic, market, and credit risks. It is shown that the price of a pure discount bond satisfies a system of coupled partial differential-integral equations under a risk-adjusted measure.

Original languageEnglish
Article number870516
Pages (from-to)1-18
Number of pages18
JournalInternational Journal of Stochastic Analysis
Volume2010
DOIs
Publication statusPublished - 2010

Bibliographical note

Copyright the Author(s) 2010. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

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