Chapter

Forward Rate Models

Tomas Björk

in Arbitrage Theory in Continuous Time

Second edition

Published in print March 2004 | ISBN: 9780199271269
Published online October 2005 | e-ISBN: 9780191602849 | DOI: http://dx.doi.org/10.1093/0199271267.003.0023

Series: Oxford Finance Series

Forward Rate Models

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The drawbacks associated with short rate models have prompted various authors to propose models that use more than one state variable. In the method proposed by Heath-Jarrow-Morton (HJM), the entire forward rate curve is chosen as the (infinite dimensional) state variable. This chapter discusses the HJM framework, martingale modelling, and the Musiela parameterization. Practice exercises are included.

Keywords: short rate models; forward rate models; Heath-Jarrow-Morton; martingale modelling; Musiela parameterization

Chapter.  3563 words. 

Subjects: Financial Markets

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