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1 LPMA - Laboratoire de Probabilités et Modèles Aléatoires

Abstract : In this paper, we consider a discrete time economy where we assume that the short term interest rate follows a quadratic term structure of a regime switching asset process. The possible non-linear structure and the fact that the interest rate can have different economic or financial trends justify the interest of Regime Switching Quadratic Term Structure Model RS-QTSM. Indeed, this regime switching process depends on the values of a Markov chain with a time dependent transition probability matrix which can well captures the different states regimes of the economy. We prove that under this modelling that the conditional zero coupon bond price admits also a quadratic term structure. Moreover, the stochastic coefficients which appear in this decomposition satisfy an explicit system of coupled stochastic backward recursions.

Keywords : Markov chain Quadratic term structure model Regime switching Zero coupon bond Markov chain.

Author: Stéphane Goutte -



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