Applying Heath-Jarrow-Morton Model to Forecasting the US Treasury Daily Yield Curve Rates

Valerii Maltsev and Michael Pokojovy
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Valerii Maltsev: Department of Mathematics and Statistics, University of Konstanz, 78464 Konstanz, Germany
Michael Pokojovy: Department of Mathematical Sciences, The University of Texas at El Paso, El Paso, TX 79968, USA

Mathematics, 2021, vol. 9, issue 2, 1-25

Abstract: The Heath-Jarrow-Morton (HJM) model is a powerful instrument for describing the stochastic evolution of interest rate curves under no-arbitrage assumption. An important feature of the HJM approach is the fact that the drifts can be expressed as functions of respective volatilities and the underlying correlation structure. Aimed at researchers and practitioners, the purpose of this article is to present a self-contained, but concise review of the abstract HJM framework founded upon the theory of interest and stochastic partial differential equations in infinite dimensions. To illustrate the predictive power of this theory, we apply it to modeling and forecasting the US Treasury daily yield curve rates. We fit a non-parametric model to real data available from the US Department of the Treasury and illustrate its statistical performance in forecasting future yield curve rates.

Keywords: Heath-Jarrow-Morton model; zero-coupon bonds; forward rates; SPDE; arbitrage-free (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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