A MULTIFACTOR GAUSS MARKOV IMPLEMENTATION OF HEATH, JARROW, AND MORTON

Alan Brace and Marek Musiela

Mathematical Finance, 1994, vol. 4, issue 3, 259-283

Abstract: Working within the Heath‐Jarrow‐Morton framework and using the theory of stochastic equations in infinite dimensions, a useful multifactor Gauss‐Markov model for the movement of the whole of the yield curve is derived. Swaptions are priced. They are hedged by eliminating random terms between the semimartingale representations of the swaption and hedging instruments. Hedging efficiency is analyzed. the model is fitted to the swap/cap strips in Australia. Computation times on a 20‐MHz laptop computer are acceptable.

Date: 1994
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