Bond pricing under a Markovian regime-switching jump-augmented Vasicek model via stochastic flows

Tak Kuen Siu*

*Corresponding author for this work

Research output: Contribution to journalArticle

36 Citations (Scopus)

Abstract

In this article, we shall explore the state of art of stochastic flows to derive an exponential affine form of the bond price when the short rate process is governed by a Markovian regime-switching jump-diffusion version of the Vasicek model. We provide the flexibility that the market parameters, including the mean-reversion level, the volatility rate and the intensity of the jump component switch over time according to a continuous-time, finite-state Markov chain. The states of the chain may be interpreted as different states of an economy or different stages of a business cycle. We shall provide a representation for the exponential affine form of the bond price in terms of fundamental matrix solutions of linear matrix differential equations.

Original languageEnglish
Pages (from-to)3184-3190
Number of pages7
JournalApplied Mathematics and Computation
Volume216
Issue number11
DOIs
Publication statusPublished - 1 Aug 2010

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