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The Term Structure Of Interest Rates As A Gaussian Random Field

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  • D. P. Kennedy

Abstract

A simple model of the term structure of interest rates is introduced in which the family of instantaneous forward rates evolves as a continuous Gaussian random field. A necessary and sufficient condition for the associated family of discounted zero-coupon bond prices to be martingales is given, permitting the consistent pricing of interest rate contingent claims. Examples of the pricing of interest-rate caps and the situation when the Gaussian random field may be viewed as a deterministic time change of the standard Brownian sheet are discussed. Copyright 1994 Blackwell Publishers.

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  • D. P. Kennedy, 1994. "The Term Structure Of Interest Rates As A Gaussian Random Field," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 247-258.
  • Handle: RePEc:bla:mathfi:v:4:y:1994:i:3:p:247-258
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