Approximating Heath-Jarrow-Morton Non-Markovian Term Structure of Interest Rate Models with Markovian Systems
AbstractWe consider a Heath-Jarrow-Morton models for the term structure of interest rates in which the forward rate volatility is a function of the instantaneous spot rate of interest, a set of dicrete forward rates and time to maturity of the bond. We show how the stochastic dynamics may be expressed as a system of Markovian stochastic differential equations. We obtain the partial differential equation which allows the pricing of contingent claims in this framework.
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Bibliographic InfoPaper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 76.
Date of creation: 01 Sep 2000
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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The European Journal of Finance,
Taylor & Francis Journals, vol. 3(1), pages 1-26.
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- Carl Chiarella & Oh-Kang Kwon, 1999.
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Research Paper Series
5, Quantitative Finance Research Centre, University of Technology, Sydney.
- 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.
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