Heavy tail and light tail of Cox-Ingersoll-Ross processes with regime-switching

Tongtong Hou, Jinghai Shao

Published 2017-09-06Version 1

This work is denoted to studying the tail behavior of Cox-Ingersoll-Ross (CIR) processes with regime-switching. One essential difference shown in this work between CIR process with regime-switching and without regime-switching is that the stationary distribution for CIR process with regime-switching could be heavy-tailed. Our results provide a theoretical evidence of the existence of regime-switching for interest rates model based on its heavy-tailed empirical evidence. In this work, we first provide sharp criteria to justify the existence of stationary distribution for the CIR process with regime-switching, which is applied to study the long term returns of interest rates. Then under the existence of the stationary distribution, we provide a criterion to justify whether its stationary distribution is heavy-tailed or not.