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A Complete Stochastic Volatility Model in the HJM Framework

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This paper considers a stochastic volatility version of the Heath, Jarrow and Morton (1992) term structure model. Market completeness is obtained by adapting the Hobson and Rogers (1998) complete stochastic volatility stock market model to the interest rate setting. Numerical simulation for a special case is used to compare the stochastic volatility model against the traditional Vasicek (1977) model.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp43.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 43.

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Date of creation: 01 Jul 2000
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Handle: RePEc:uts:rpaper:43

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  1. Andrew Carverhill, 1994. "When Is The Short Rate Markovian?," Mathematical Finance, Wiley Blackwell, vol. 4(4), pages 305-312.
  2. Carl Chiarella & Oh Kang Kwon, 2001. "Forward rate dependent Markovian transformations of the Heath-Jarrow-Morton term structure model," Finance and Stochastics, Springer, vol. 5(2), pages 237-257.
  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
  4. R. Bhar & C. Chiarella, 1997. "Transformation of Heath?Jarrow?Morton models to Markovian systems," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 1-26.
  5. de Jong, Frank & Santa-Clara, Pedro, 1999. "The Dynamics of the Forward Interest Rate Curve: A Formulation with State Variables," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 131-157, March.
  6. David G. Hobson & L. C. G. Rogers, 1998. "Complete Models with Stochastic Volatility," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 27-48.
  7. Carl Chiarella & Oh-Kang Kwon, 2000. "A Class of Heath-Jarrow-Morton Term Structure Models with Stochastic Volatility," Research Paper Series 34, Quantitative Finance Research Centre, University of Technology, Sydney.
  8. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  9. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
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Cited by:
  1. Paolo Foschi & Andrea Pascucci, 2008. "Path dependent volatility," Decisions in Economics and Finance, Springer, vol. 31(1), pages 13-32, May.
  2. Eusebio Valero & Manuel Torrealba & Lucas Lacasa & Fran\c{c}ois Fraysse, 2011. "Fast resolution of a single factor Heath-Jarrow-Morton model with stochastic volatility," Papers 1108.1688, arXiv.org.
  3. Andrea Pascucci & Paolo Foschi, 2005. "Calibration of the Hobson&Rogers model: empirical tests," Finance 0509020, EconWPA.
  4. Foschi, Paolo & Pascucci, Andrea, 2009. "Calibration of a path-dependent volatility model: Empirical tests," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2219-2235, April.

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