Small-noise limit of the quasi-Gaussian log-normal HJM model

Dan Pirjol and Lingjiong Zhu

Papers from arXiv.org

Abstract: Quasi-Gaussian HJM models are a popular approach for modeling the dynamics of the yield curve. This is due to their low dimensional Markovian representation, which greatly simplifies their numerical implementation. We present a qualitative study of the solutions of the quasi-Gaussian log-normal HJM model. Using a small-noise deterministic limit we show that the short rate may explode to infinity in finite time. This implies the explosion of the Eurodollar futures prices in this model. We derive explicit explosion criteria under mild assumptions on the shape of the yield curve.

Date: 2019-08
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Published in Operations Research Letters 2017, Volume 45, 6-11

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1908.07098

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