Bootstrap Results From the State Space From Representation of the Heath-Jarrow-Morton Model

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

No 66, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper builds upon the authors' previous work on transformation of the Heath-Jarrow-Morton (HJM) model of the term structure of interest rates to state space form for a fairly general class of volatility specification including stochastic variables. Estimation of this volatility function is at the heart of the identification of the HJM model. The paper develops a bootstrap procedure for the HJM model cast into the non-linear filtering framework to analyse the statistical significance of the estimators. It is shown that not all combinations of the parameters of the volatility function are equally likely. The procedure also reveals distributional properties of the instantaneous spot rate of interest implied by the HJM model.

Keywords: Heath-Jarrow-Morton model; arbitrage-free; stochastic volatility; non-linear filtering; bootstrap (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 47 pages
Date: 1996-08-01
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