Pricing bond options under a Markovian regime-switching Hull–White model
In this paper, we investigate the valuation of bond options under a Markovian regime-switching Hull–White model, where both the mean-reverting level and the volatility of the interest rate are modulated by a continuous-time, finite-state Markov chain. Using techniques of measure changes and the inve...
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| Veröffentlicht in: | Economic modelling 2013-01, Vol.30, p.933-940 |
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| creator | Shen, Yang Siu, Tak Kuen |
| description | In this paper, we investigate the valuation of bond options under a Markovian regime-switching Hull–White model, where both the mean-reverting level and the volatility of the interest rate are modulated by a continuous-time, finite-state Markov chain. Using techniques of measure changes and the inverse Fourier transform, we obtain an integral representation for the pricing formula of a standard European option on a zero-coupon bond. Numerical results for the prices and implied volatilities of bond options arising in our model are given in a two-regime case.
► The valuation of bond options is considered in a regime-switching Hull–White model. ► The mean-reverting level and the volatility are related to economic regimes. ► A pricing formula is derived using the forward measure and the Fourier transform. |
| doi_str_mv | 10.1016/j.econmod.2012.09.041 |
| format | Article |
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► The valuation of bond options is considered in a regime-switching Hull–White model. ► The mean-reverting level and the volatility are related to economic regimes. ► A pricing formula is derived using the forward measure and the Fourier transform.</description><subject>Bond options</subject><subject>Economic models</subject><subject>Europe</subject><subject>Forward measures</subject><subject>Fourier transforms</subject><subject>Hull–White model</subject><subject>Interest rates</subject><subject>Inverse Fourier transform</subject><subject>Markov analysis</subject><subject>Markovian processes</subject><subject>Mathematical models</subject><subject>Pricing</subject><subject>Regime-switching</subject><subject>Securities prices</subject><subject>Studies</subject><subject>Volatility</subject><subject>Zero coupon bonds</subject><issn>0264-9993</issn><issn>1873-6122</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2013</creationdate><recordtype>article</recordtype><recordid>eNqFkL1OwzAURi0EEqXwCEiRWFgSbMdx4gmhCigIBAOI0Ursm9YltYudgNh4B96QJ8FVO7GgO9zlfPfnIHRMcEYw4WeLDJSzS6czignNsMgwIztoRKoyTzmhdBeNMOUsFULk--gghAXGmBImRuj20Rtl7CxpnNWJW_XG2ZAMVoNP6uS-9q_u3dQ28TAzS0jDh-nVfM1Ph677-fp-mZsekrgbukO019ZdgKNtH6Pnq8unyTS9e7i-mVzcpYrlrE8Z4WXF6pZq0WgomeZ5RSpKhaoKxgHnBQHaiqZty1LpijYlLXCM6DbnOW-bfIxON3NX3r0NEHq5NEFB19UW3BAkoVUswRmO6MkfdOEGb-N1keKcFowWZaSKDaW8C8FDK1feLGv_KQmWa8NyIbeG5dqwxEJGwzF3vslB_PbdgJdBGbAKtPGgeqmd-WfCL6iRht0</recordid><startdate>201301</startdate><enddate>201301</enddate><creator>Shen, Yang</creator><creator>Siu, Tak Kuen</creator><general>Elsevier B.V</general><general>Elsevier Science Ltd</general><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>201301</creationdate><title>Pricing bond options under a Markovian regime-switching Hull–White model</title><author>Shen, Yang ; Siu, Tak Kuen</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c434t-416784af2d9bde74d63818229c8546e0351e2f9bff77cd82b7250678df3636fb3</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2013</creationdate><topic>Bond options</topic><topic>Economic models</topic><topic>Europe</topic><topic>Forward measures</topic><topic>Fourier transforms</topic><topic>Hull–White model</topic><topic>Interest rates</topic><topic>Inverse Fourier transform</topic><topic>Markov analysis</topic><topic>Markovian processes</topic><topic>Mathematical models</topic><topic>Pricing</topic><topic>Regime-switching</topic><topic>Securities prices</topic><topic>Studies</topic><topic>Volatility</topic><topic>Zero coupon bonds</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Shen, Yang</creatorcontrib><creatorcontrib>Siu, Tak Kuen</creatorcontrib><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>Economic modelling</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Shen, Yang</au><au>Siu, Tak Kuen</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Pricing bond options under a Markovian regime-switching Hull–White model</atitle><jtitle>Economic modelling</jtitle><date>2013-01</date><risdate>2013</risdate><volume>30</volume><spage>933</spage><epage>940</epage><pages>933-940</pages><issn>0264-9993</issn><eissn>1873-6122</eissn><abstract>In this paper, we investigate the valuation of bond options under a Markovian regime-switching Hull–White model, where both the mean-reverting level and the volatility of the interest rate are modulated by a continuous-time, finite-state Markov chain. Using techniques of measure changes and the inverse Fourier transform, we obtain an integral representation for the pricing formula of a standard European option on a zero-coupon bond. Numerical results for the prices and implied volatilities of bond options arising in our model are given in a two-regime case.
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| language | eng |
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| source | Elsevier ScienceDirect Journals Complete |
| subjects | Bond options Economic models Europe Forward measures Fourier transforms Hull–White model Interest rates Inverse Fourier transform Markov analysis Markovian processes Mathematical models Pricing Regime-switching Securities prices Studies Volatility Zero coupon bonds |
| title | Pricing bond options under a Markovian regime-switching Hull–White model |
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