Jump-telegraph models for the short rate: pricing and convexity adjustments of zero coupon bonds

2019/01/10 by Lopez, Oscar, Oleaga, Gerardo E., Sanchez, Alejandra
#FOS: Economics and business #Mathematical Finance (q-fin.MF)

paper · doi:10.48550/arxiv.1901.02995

Abstract

In this article, we consider a Markov-modulated model with jumps for short rate dynamics. We obtain closed formulas for the term structure and forward rates using the properties of the jump-telegraph process and the expectation hypothesis. The results are compared with the numerical solution of the corresponding partial differential equation.

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