Elliott, RobertSiu, Tak KuenBadescu, Alex2012-06-132012-06-132011Robert 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 - 10470307-4358http://hdl.handle.net/1880/48987Article deposited according to publisher policy posted on SHERPA/ROMEO, June 13, 2012Purpose – 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.engbondsSecuritiesInterest ratesFinance modelingDouble Esscher transformRegime switching riskMarkov chainExponential affine formContinuous-time modelsProduct density processesjournal article10.11575/PRISM/34067