Pricing bond options under a Markovian regime-switching Hull-White model

Yang Shen, Tak Kuen Siu*

*Corresponding author for this work

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

In this paper, we investigate the valuation of bond options under a Markovian regime-switching Hull-White model, where both the mean-reverting level and the volatility of the interest rate are modulated by a continuous-time, finite-state Markov chain. Using techniques of measure changes and the inverse Fourier transform, we obtain an integral representation for the pricing formula of a standard European option on a zero-coupon bond. Numerical results for the prices and implied volatilities of bond options arising in our model are given in a two-regime case.

Original languageEnglish
Pages (from-to)933-940
Number of pages8
JournalEconomic Modelling
Volume30
DOIs
Publication statusPublished - Jan 2013

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