The stochastic string model as a unifying theory of the term structure of interest rates

Alberto Bueno-Guerrero, Manuel Moreno and Javier Navas

Physica A: Statistical Mechanics and its Applications, 2016, vol. 461, issue C, 217-237

Abstract: We present the stochastic string model of Santa-Clara and Sornette (2001), as reformulated by Bueno-Guerrero et al. (2015), as a unifying theory of the continuous-time modeling of the term structure of interest rates. We provide several new results, such as: (a) an orthogonality condition for the volatilities in the Heath, Jarrow, and Morton (1992) (HJM) model, (b) the interpretation of multi-factor HJM models as approximations to a full infinite-dimensional model, (c) a result of consistency based on Hilbert spaces, and (d) a theorem for option valuation.

Keywords: Stochastic string; Infinite-dimensional model; Term structure; Mercer theorem; Principal component analysis; Derivatives pricing (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:461:y:2016:i:c:p:217-237

DOI: 10.1016/j.physa.2016.05.044

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