HEATH–JARROW–MORTON INTEREST RATE DYNAMICS AND APPROXIMATELY CONSISTENT FORWARD RATE CURVES |
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Authors: | Claudia La Chioma Benedetto Piccoli |
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Institution: | Finanza Quantitativa, Capitalia, Roma; Istituto per le Applicazioni del Calcolo "M. Picone" Consiglio Nazionale Delle Ricerche, Roma |
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Abstract: | We study a finite-dimensional approach to the Heath–Jarrow–Morton model for interest rate and introduce a notion of approximate consistency for a family of functions in a deterministic and stochastic framework. This amounts to asking the decrease of the minimum distance in least squares sense. We start from a general linearly parameterized set of functions and extend the theory to a nonlinear Nelson–Siegel family. Necessary and sufficient condition to have approximately consistency are given as well as a criterion of stability for the approximation. |
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Keywords: | interest rate modeling HJM models NS families finite dimensional family consistency |
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