"Stiff" Field Theory of Interest Rates and Psychological Future Time
AbstractThe simplest field theory description of the multivariate statistics of forward rate variations over time and maturities, involves a quadratic action containing a gradient squared rigidity term. However, this choice leads to a spurious kink (infinite curvature) of the normalized correlation function for coinciding maturities. Motivated by empirical results, we consider an extended action that contains a squared Laplacian term, which describes the bending stiffness of the FRC. With the extra ingredient of a `psychological' future time, describing how the perceived time between events depends on the time in the future, our theory accounts extremely well for the phenomenology of interest rate dynamics.
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Bibliographic InfoPaper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500064.
Date of creation: Mar 2004
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Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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