Approximating Heath-Jarrow-Morton Non-Markovian Term Structure of Interest Rate Models with Markovian Systems
We 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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- Carl Chiarella & Oh-Kang Kwon, 1999.
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Research Paper Series
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in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305
World Scientific Publishing Co. Pte. Ltd..
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