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arXiv · 1210.3164

A Semi-Markov Modulated Interest Rate Model

Guglielmo D'Amico·Raimondo Manca·Giovanni Salvi
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Abstract

In this paper we propose a semi-Markov modulated model of interest rates. We assume that the switching process is a semi-Markov process with finite state space E and the modulated process is a diffusive process. We derive recursive equations for the higher order moments of the discount factor and we describe a Monte Carlo al- gorithm to execute simulations. The results are specialized to classical models as those by Vasicek, Hull and White and CIR with a semi-Markov modulation.

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Guglielmo D'Amico, Raimondo Manca, Giovanni Salvi. 2012-10-11. A Semi-Markov Modulated Interest Rate Model. https://arxiv.org/abs/1210.3164

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