Stochastic Forward Rate and Yield Curve Modeling

Mario V. Wüthrich and Michael Merz
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Mario V. Wüthrich: ETH Zurich
Michael Merz: University of Hamburg

Chapter Chapter 4 in Financial Modeling, Actuarial Valuation and Solvency in Insurance, 2013, pp 97-130 from Springer

Abstract: Abstract The state price deflators introduced in the previous chapter have several weaknesses such as they do not allow for sufficient modeling flexibility in practice and as they do not provide convincing fits to real data. In the present chapter we introduce the Heath–Jarrow–Morton (HJM) framework which is much more flexible and allows for potentially infinite dimensional term structure curves. Crucial in the HJM framework is the no-arbitrage condition which leads to the so-called HJM term that is analyzed in this chapter. We give explicit examples for the HJM framework in terms of the Cairns forward rate model and of the Teichmann–Wüthrich yield curve prediction model.

Keywords: Yield Curve; Forward Rate; Equivalent Martingale Measure; Gaussian Random Vector; Forward Price (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-642-31392-9_4

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DOI: 10.1007/978-3-642-31392-9_4

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