Wolfgang Runggaldier

University of Padova

Interest rate derivatives pricing when the short rate is a continuous time finite state Markov process

Abstract: In a joint paper with T. Björk and Yu.Kabanov in '97 we considered bond pricing in affine jump-diffusion term structure models. In '02 D.Filipovic and J.Zabczyk studied affine term structure models in discrete time. Inspired by these studies, here we consider an intermediate model where the short rate evolves as a continuous time Markov chain with a finite number of states and study bond an interest rate derivatives pricing. The approach can be extended to the multifactor case thus allowing to consider also a defaultable context. Numerical results will be discussed as well

Joint work with Valentina Prezioso