Simulating and validating a multi-factor Heath, Jarrow and Morton model with negative interest rates

Robert Jarrow () and Donald R. Van Deventer

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 4, 332-346

Abstract: This paper explains how to ensure that a Heath, Jarrow and Morton (HGM) term structure of interest rates model is economically and statistically valid. Economic validity is needed for the stability of the assumed evolution. An economically valid model is arbitrage free. Statistical validity is needed to ensure the model predicts the future well. A statistically valid model needs to incorporate both negative rates and multiple factors. The paper includes an example of an economic and statistically valid HJM model.

Keywords: HJM model; term structure of interest rates; arbitrage free; multiple factors; negative interest rates; affine models (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:4:p:332-346

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