Modeling the Volatility of the Heath-Jarrow-Morton Model: A Multi-factor GARCH Analysis | Zendy

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Modeling the Volatility of the Heath-Jarrow-Morton Model: A Multi-factor GARCH Analysis

Author(s) -

Anjun Zhou

Publication year - 2000

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.244521

Subject(s) - autoregressive conditional heteroskedasticity , volatility (finance) , econometrics , economics , sabr volatility model , financial economics , implied volatility

Based on the nonparametric study of Pearson and Zhou (1999), a parametric HJM model is developed for the forward rate volatility. It allows the volatility of the forward rate with different maturities to react in a different way with the level of forward rate and the forward spread. Specifically, the proposed forward rate volatility function is imbedded into GARCH family models and compared with several widely used HJM volatility specifications. It is shown that the proposed volatility specification performs the best. It is also confirmed that the volatility of forward rate with different maturities depends on the forward rate and the forward spread in a different way.

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