JFEC invited paper regime switching and bond pricing

C. Gourieroux, A.M.E. Monfort, F. Pegoraro, J.-P. Renne

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Scopus)

Abstract

This article proposes an overview of the usefulness of the regime switching approach for building various kinds of bond pricing models and of the roles played by the regimes in these models. Both default-free and defaultable bonds are considered. The regimes can be used to capture stochastic drifts and/or volatilities, to represent discrete target rates, to incorporate business cycles or crises, to introduce contagion, to reproduce zero lower bound spells, or to evaluate the impact of standard or nonstandard monetary policies. From a technical point of view, we stress the key role of Markov chains, Compound Autoregressive (Car) processes, Regime Switching Car processes and multihorizon Laplace transforms.
Original languageEnglish
Pages (from-to)237-277
Number of pages41
JournalJournal of Financial Econometrics
Volume12
Issue number2
DOIs
Publication statusPublished - 1 Jan 2014

Keywords

  • term structure
  • regime switching
  • affine models
  • car process
  • multi-horizon Laplace transform
  • contagion
  • default risk
  • monetary policy
  • TERM STRUCTURE MODELS
  • FOREIGN-EXCHANGE RISK
  • INTEREST-RATES
  • RATIONAL-EXPECTATIONS
  • ELECTRICITY PRICES
  • ASSET ALLOCATION
  • FEDERAL-RESERVE
  • SHIFTS
  • LIQUIDITY
  • INFORMATION

Cite this

Gourieroux, C., Monfort, A. M. E., Pegoraro, F., & Renne, J-P. (2014). JFEC invited paper regime switching and bond pricing. Journal of Financial Econometrics, 12(2), 237-277. https://doi.org/10.1093/jjfinec/nbt019