This paper introduces a general regime switching Levy process, and constructs the characteristic function in closed form. Correlations between the underlying Markov chain and the asset returns are also allowed, by imposing asset price jumps whenever a regime change takes place. Based on the...

Markovian interest rate models are very popular for the pricing and hedging of interest rate sensitive products. In this paper we implement interest rate models that depend on a finite Markov chain. We construct the primitive Arrow-Debreu security prices and show how bonds, bond options and...

We consider counterparty risk for Credit Default Swaps (CDS) in presence of correlation between default of the counterparty and default of the CDS reference credit. Our approach is innovative in that, besides default correlation, which was taken into account in earlier approaches, we also model...