"Stiff" Field Theory of Interest Rates and Psychological Future Time
The 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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|Date of creation:||Mar 2004|
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- Jean-Philippe Bouchaud & Nicolas Sagna & Rama Cont & Nicole El-Karoui & Marc Potters, 1997.
"Phenomenology of the interest rate curve,"
Science & Finance (CFM) working paper archive
500048, Science & Finance, Capital Fund Management.
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"The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks,"
Review of Financial Studies,
Society for Financial Studies, vol. 14(1), pages 149-85.
- P. Santa-Clara & D. Sornette, 1998. "The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks," Papers cond-mat/9801321, arXiv.org.
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