Regime Switching CIR Tree

Abstract

In time series of financial data one often observes significant sudden changes as in the credit crisis in 2008. One way to model those changes is regime switching. Here we show how to handle regime switching in a tree associated with a Cox-Ingersoll-Ross short rate process.

Keywords: Regime Switching, Cox-Ingersoll-Ross, Tree Approximation

JEL Classification: G13