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A MULTIFACTOR GAUSS MARKOV IMPLEMENTATION OF HEATH, JARROW, AND MORTON
Author(s) -
Brace Alan,
Musiela Marek
Publication year - 1994
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1994.tb00095.x
Subject(s) - semimartingale , heath–jarrow–morton framework , swap (finance) , mathematical economics , econometrics , markov chain , computation , computer science , mathematics , economics , mathematical optimization , volatility (finance) , algorithm , statistics , finance
Working within the Heath‐Jarrow‐Morton framework and using the theory of stochastic equations in infinite dimensions, a useful multifactor Gauss‐Markov model for the movement of the whole of the yield curve is derived. Swaptions are priced. They are hedged by eliminating random terms between the semimartingale representations of the swaption and hedging instruments. Hedging efficiency is analyzed. the model is fitted to the swap/cap strips in Australia. Computation times on a 20‐MHz laptop computer are acceptable.