TY  - JOUR
AB  - 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.Originality/value– The methods and results presented in the paper are new.
VL  - 37
IS  - 11
SN  - 0307-4358
DO  - 10.1108/03074351111167929
UR  - https://doi.org/10.1108/03074351111167929
AU  - Elliott Robert J.
AU  - Kuen Siu Tak
AU  - Badescu Alex
ED  - Shuangzhe Liu
ED  - Milind Sathye
PY  - 2011
Y1  - 2011/01/01
TI  - Bond valuation under a discrete‐time regime‐switching term‐structure model and its continuous‐time extension
T2  - Managerial Finance
PB  - Emerald Group Publishing Limited
SP  - 1025
EP  - 1047
Y2  - 2024/04/25
ER  -