Please use this identifier to cite or link to this item: http://hdl.handle.net/1880/48987
Title: Bond valuation under a discrete-time regime-switching term-structure model and its continuous-time extension
Authors: Elliott, Robert
Siu, Tak Kuen
Badescu, Alex
Keywords: bonds;Securities
Issue Date: 2011
Publisher: Emerald
Citation: Robert J. Elliott, Tak Kuen Siu, Alex Badescu, (2011) "Bond valuation under a discrete-time regime-switching term-structure model and its continuous-time extension", Managerial Finance, Vol. 37 Iss: 11, pp.1025 - 1047
Abstract: Purpose – The purpose of this paper is to consider a discrete-time, Markov, regime-switching, affine term-structure model for valuing bonds and other interest rate securities. The proposed model incorporates the impact of structural changes in (macro)-economic conditions on interest-rate dynamics. The market in the proposed model is, in general, incomplete. A modified version of the Esscher transform, namely, a double Esscher transform, is used to specify a price kernel so that both market and economic risks are taken into account. Design/methodology/approach – The market in the proposed model is, in general, incomplete. A modified version of the Esscher transform, namely, a double Esscher transform, is used to specify a price kernel so that both market and economic risks are taken into account. Findings – The authors derive a simple way to give exponential affine forms of bond prices using backward induction. The authors also consider a continuous-time extension of the model and derive exponential affine forms of bond prices using the concept of stochastic flows.
Description: Article deposited according to publisher policy posted on SHERPA/ROMEO, June 13, 2012
URI: http://hdl.handle.net/1880/48987
ISSN: 0307-4358
Appears in Collections:Elliott, Robert

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