Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
4632140 | Applied Mathematics and Computation | 2010 | 7 Pages |
In this article, we shall explore the state of art of stochastic flows to derive an exponential affine form of the bond price when the short rate process is governed by a Markovian regime-switching jump-diffusion version of the Vasicek model. We provide the flexibility that the market parameters, including the mean-reversion level, the volatility rate and the intensity of the jump component switch over time according to a continuous-time, finite-state Markov chain. The states of the chain may be interpreted as different states of an economy or different stages of a business cycle. We shall provide a representation for the exponential affine form of the bond price in terms of fundamental matrix solutions of linear matrix differential equations.