Abstract
This paper studies Heath–Jarrow–Morton‐type models with regime‐switching stochastic volatility. In this setting the forward rate volatility is allowed to depend on the current forward rate curve as well as on a continuous time Markov chain y with finitely many states. Employing the framework developed by Björk and Svensson we find necessary and sufficient conditions on the volatility guaranteeing the representation of the forward rate process by a finite‐dimensional Markovian state space model. These conditions allow us to investigate regime‐switching generalizations of some well‐known models such as those by Ho–Lee, Hull–White, and Cox–Ingersoll–Ross.
Published Version
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