A Markov regime-switching marked point process for short-rate analysis with credit risk

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Abstract

We investigate a Markov, regime-switching, marked point process for the short-term interest rate in a market. The intensity of the marked point process is a bounded, predictable process and is modulated by two observable factors. One is an economic factor described by a diffusion process, and another one is described by a Markov chain. The states of the chain are interpreted as different rating categories of corporate credit ratings issued by rating agencies. We consider a general pricing kernel which can explicitly price economic, market, and credit risks. It is shown that the price of a pure discount bond satisfies a system of coupled partial differential-integral equations under a risk-adjusted measure. Copyright © 2010 Tak Kuen Siu.

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APA

Siu, T. K. (2010). A Markov regime-switching marked point process for short-rate analysis with credit risk. International Journal of Stochastic Analysis, 2010. https://doi.org/10.1155/2010/870516

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