HEATH–JARROW–MORTON INTEREST RATE DYNAMICS AND APPROXIMATELY CONSISTENT FORWARD RATE CURVES

Claudia La Chioma and Benedetto Piccoli

Mathematical Finance, 2007, vol. 17, issue 3, 427-447

Abstract: We study a finite‐dimensional approach to the Heath–Jarrow–Morton model for interest rate and introduce a notion of approximate consistency for a family of functions in a deterministic and stochastic framework. This amounts to asking the decrease of the minimum distance in least squares sense. We start from a general linearly parameterized set of functions and extend the theory to a nonlinear Nelson–Siegel family. Necessary and sufficient condition to have approximately consistency are given as well as a criterion of stability for the approximation.

Date: 2007
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https://doi.org/10.1111/j.1467-9965.2007.00310.x

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