10.1080/14697688.2002.0000012

An interest rate model with a Markovian mean reverting level

Abstract

A two-factor Vasicek model, where the mean reversion level changes according to a continuous time finite state Markov chain, is considered. This model could capture the behaviour of monetary authorities who normally set a reference rate which changes from time to time. We derive the term structure via the analytic expression of the bond price that involves a fundamental matrix. The validity of the bond price closed form solution is verified via the forward rate dynamics.

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Research Papers in Economics

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Last time updated on 7/6/2012

This paper was published in Research Papers in Economics.

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