Review of Financial Studies Vol. 13 No. 2 2000
The Term Structure of Interest Rates as a Random Field
Abstract
Forward rate dynamics are modeled as a random field. In contrast to multifactor models, random field models offer a parsimonious description of term structure dynamics, while eliminating the self-inconsistent practice of recalibration. The form of the drift of the instantaneous forward rate process necessary to preclude arbitrage under the risk-neutral measure is obtained. Forward risk-adjusted measures are identified and used to price a bond option when the forward volatility structure depends on the square root of the current spot rate. Several classes of tractable random field models are presented.
- Volume
- 13
- Issue
- 2
- Pages
- 365-384
- Sources
- bibtex:phds-export.bib