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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- R. Bhar & C. Chiarella, 1997.
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- Carl Chiarella & Oh-Kang Kwon, 1999. "Forward Rate Dependent Markovian Transformations of the Heath-Jarrow-Morton Term Structure Model," Research Paper Series 5, Quantitative Finance Research Centre, University of Technology, Sydney.
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