A regime-switching term structure model with observable state variables

Ferland, René; Gauthier, Geneviève; Lalancette, Simon

doi:10.1016/j.frl.2010.01.001

Cited by 3 publications

(2 citation statements)

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“…Thus, the regime‐shift mechanism of the target rate is articulated over two state variables

false(θ_{t}, ρ_{t} false)

where

ρ_{t}

is the statistical latent regime in which

θ_{t}

evolves. We resort to a discrete time‐inhomogeneous Markov chain approach to capture the dynamics of these two state variables as in Ferland, Gauthier, and Lalancette (). This is motivated by the target rate that changes on FOMC meetings as a step function of multiples of

\pm 25

basis points.…”

Section: Model For Interest‐rate Caps Under Fomc Meetingsmentioning

confidence: 99%

“…The full estimation approach is a daunting task where 29 parameters are estimated simultaneously, all cast into a highly nonlinear objective function. To circumvent this obstacle, we first estimate the semi‐hidden Markov chain

false(θ_{t}, ρ_{t} false)

as in Ferland et al () and, in turn, use the resulting estimates to optimize the global likelihood function. The estimation results under the data‐generating measure are reported in the first part of Table .…”

Section: Estimationmentioning

confidence: 99%

See 1 more Smart Citation

The Sensitivity of Interest Rate Options to Monetary Policy Decisions: A Regime‐Shift Pricing Approach

Ferland

Gauthier

Lalancette

2015

Journal of Futures Markets

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We look at whether monetary decisions constitute a significant macro‐finance risk for interest rate options and related implied volatilities. We devise an option‐pricing model based on the dynamics of the Federal Reserve's target rate via a regime‐shift approach modeled as discrete Markov chain capturing the timing of Federal Open Market Committee meetings. We find that the regime‐shift risk is significantly priced and that the downward and stable regimes of the target rate, associated with a decline in real activity, display higher probabilities of occurrence under the risk‐neutral measure. We also observe that implied volatilities display a counter‐cyclical behavior. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:66–87, 2016

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“…Thus, the regime‐shift mechanism of the target rate is articulated over two state variables