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Pricing of discount bonds with a Markov switching regime |
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| Authors: | Robert J Elliott Katsumasa Nishide |
| Institution: | 1. School of Mathematics, University of Adelaide, Adelaide, SA, Australia 2. Center for Applied Financial Studies, University of South Australia, Adelaide, SA, Australia 3. Haskayne School of Business, University of Calgary, Calgary, AB, Canada 4. Department of Economics, Yokohama National University, 79-4 Tokiwadai, Hodogaya-ku, Yokohama, 240-8501, Japan |
| 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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