Transformation of Heath-Jarrow-Morton Models to Markovian Systems

Ram Bhar and Carl Chiarella
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Ram Bhar: School of Banking and Finance, University of New South Wales

No 53, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: A class of volatility functions for the forward rate process is considered, which allows the bond price dynamics in the Heath-Jarrow-Morton (HJM) framework to be reduced to a finite dimensional Markovian system. The use of this Markovian system in estimation of parameters of the volatility function via use of the Kalman filter is discussed. Further, the Markovian system allows the link to be drawn between the HJM and the Vasicek/Cox-Ingersoll-Ross (CIR) frameworks for modelling the term structure of interest rates.

Pages: 31 pages
Date: 1995-12-01
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Citations: View citations in EconPapers (32)

Published as: Bhar, R. and Chiarella, C., 1997, "Transformation of Heath-Jarrow-Morton models to Markovian systems", The European Journal of Finance, 3(1), ,1-26.

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Journal Article: Transformation of Heath?Jarrow?Morton models to Markovian systems (1997)
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