PROJECTING THE FORWARD RATE FLOW ONTO A FINITE DIMENSIONAL MANIFOLD

DOI10.1142/S0219024906003743MaRDI QIDQ5487841zbMATH OpenFDO

Authors Erhan Bayraktar, Li Chen, H. Vincent Poor

Publication date 12 September 2006

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cs/0509028

zbMATH Keywords

interest rate modelsconsistency problemsinfinite dimensional stochastic differential equationscalibration of HJM models

Mathematics Subject Classification ID

Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: Given a Heath-Jarrow-Morton (HJM) interest rate model $mathcalM$ and a parametrized family of finite dimensional forward rate curves $mathcalG$, this paper provides a technique for projecting the infinite dimensional forward rate curve $r_t$ given by $mathcalM$ onto the finite dimensional manifold $mathcalG$.The Stratonovich dynamics of the projected finite dimensional forward curve are derived and it is shown that, under the regularity conditions, the given Stratonovich differential equation has a unique strong solution. Moreover, this projection leads to an efficient algorithm for implicit parametric estimation of the infinite dimensional HJM model. The feasibility of this method is demonstrated by applying the generalized method of moments.

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Cites work

• A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix
• A note on the Nelson-Siegel family
• Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation
• Consistency Problems for Jump‐diffusion Models
• Existence of invariant manifolds for stochastic equations in infinite dimension
• Interest rate dynamics and consistent forward rate curves
• Large Sample Properties of Generalized Method of Moments Estimators
• On the existence of finite-dimensional realizations for nonlinear forward rate models.

Cited in

(5)

• Compact embeddings for spaces of forward rate curves
• Reprojecting Partially Observed Systems with Application to Interest Rate Diffusions
• Consistency problems for Heath-Jarrow-Morton interest rate models
• HEATH–JARROW–MORTON INTEREST RATE DYNAMICS AND APPROXIMATELY CONSISTENT FORWARD RATE CURVES
• Shape factors and cross-sectional risk

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