Transformation of Heath?Jarrow?Morton models to Markovian systems
- 1 March 1997
- journal article
- research article
- Published by Taylor & Francis in The European Journal of Finance
- Vol. 3 (1) , 1-26
- https://doi.org/10.1080/135184797337516
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.Keywords
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