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Simulating and validating a multi-factor Heath, Jarrow and Morton model with negative interest rates
Journal of Risk Management in Financial Institutions,
8
(4),
332-346
(2015)
Abstract
This paper explains how to ensure that a Heath, Jarrow and Morton (HGM) term structure of interest rates model is economically and statistically valid. Economic validity is needed for the stability of the assumed evolution. An economically valid model is arbitrage free. Statistical validity is needed to ensure the model predicts the future well. A statistically valid model needs to incorporate both negative rates and multiple factors. The paper includes an example of an economic and statistically valid HJM model.
Keywords: HJM model; term structure of interest rates; arbitrage free; multiple factors; negative interest rates; affine models
The full article is available to subscribers to the journal.
Author's Biography
Robert A. Jarrow is a professor at the Johnson Graduate School of Management, Cornell University and director of research at Kamakura Corporation. He is the co-creator of the HJM model and the reduced form credit risk model. Robert received the 1997 IAFE/SunGard Financial Engineer of the Year Award and Risk Magazine’s 2009 Lifetime Achievement Award. He is in the Fixed Income Analysts Society Hall of Fame and Risk Magazine’s 50-member Hall of Fame.
Donald R. Van Deventer is Chairman and Chief Executive Officer of Kamakura Corporation.
Citation
Jarrow, Robert A. and Van Deventer, Donald R. (2015, October 1). Simulating and validating a multi-factor Heath, Jarrow and Morton model with negative interest rates. In the Journal of Risk Management in Financial Institutions, Volume 8, Issue 4. https://doi.org/10.69554/OZWW7850.
© Henry Stewart
Publications LLP
Publications LLP