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Factors' correlation in the Heath–Jarrow–Morton interest rate model

✍ Scribed by Leonard Tchuindjo

Book ID
101653876
Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
94 KB
Volume
24
Category
Article
ISSN
1524-1904

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✦ Synopsis

Abstract

We propose a new derivation of the Heath–Jarrow–Morton risk‐neutral drift restriction that takes into account nonzero instantaneous correlations between factors. The result allows avoiding the orthogonalization of factors and provides an approach by which interest rate derivatives can be priced by preserving the economic meaning of each underlying factor. An application is given for the term structure of credit‐risky bonds, driven by two correlated factors—the risk‐free forward rate and the forward credit spreads. Copyright © 2008 John Wiley & Sons, Ltd.

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✍ Samuel Yau Man Zeto 📂 Article 📅 2002 🏛 John Wiley and Sons 🌐 English ⚖ 408 KB

## Abstract Most previous empirical studies using the Heath–Jarrow–Morton model (hereafter referred to as the HJM model) have focused on the one‐factor model. In contrast, this study implements the Das (1999) two‐factor Poisson–Gaussian version of the HJM model that incorporates a jump component as