Heath -Jarrow -Morton model and its application

Vladimir I Pozdynyakov, University of Pennsylvania

Abstract

The main result of this thesis shows that for a large class of widely used term structure models there is a simple theoretical upper bound for value of LIBOR futures prices. Nevertheless, when this bound is compared to observed futures prices, one finds that the theoretical bound is sometimes violated by market prices. The main consequence of this observation is that virtually all of the widely used fixed income models have theoretical implications that are sometimes at odds with market realities, at least when they are applied to futures markets. Only a partial explanation of this market anomaly is provided. ^ The first Chapter of the thesis largely servers to provide a careful description of the Heath-Jarrow-Morton term structure model. Chapter 2 then provides some new results which yield simple conditions on the underlying forward rate process that suffice to guarantee that the HJM bond market model is complete. The last Chapter then addresses the main results summarized above. The theoretical analysis is driven by the need to relate martingale methods to the forward rate drift restriction of the HJM model. The empirical analysis is based on data from Chicago Mercantile Exchange and British Bankers' Association for 1998. ^

Subject Area

Mathematics|Statistics

Recommended Citation

Vladimir I Pozdynyakov, "Heath -Jarrow -Morton model and its application" (January 1, 2001). Dissertations available from ProQuest. Paper AAI3015358.
http://repository.upenn.edu/dissertations/AAI3015358

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