The Heath-Jarrow-Morton Model with Regime Shifts and Jumps Priced

The pricing of regime-switching risk in a Markovian, regime-switching, Heath-Jarrow-Morton environment in Elliott and Siu (2016) is re-visited. An ex-tended Heath-Jarrow-Morton model for stochastic forward rates... [ view full abstract ]

The pricing of regime-switching risk in a Markovian, regime-switching, Heath-
Jarrow-Morton environment in Elliott and Siu (2016) is re-visited. An ex-
tended Heath-Jarrow-Morton model for stochastic forward rates incorporating
both regime shifts and jumps is considered, where jumps in the forward rate
dynamics are directly triggered by regime switches. No-arbitrage drift condi-
tions taking into account the pricing of both the regime-switching and jump
risks are derived by considering two situations. The rst situation starts with a
risk-neutral measure while the second situation starts with a real-world measure.
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