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Computer Science > Computational Engineering, Finance, and Science

Title:Projecting the Forward Rate Flow onto a Finite Dimensional Manifold

Abstract: Given a Heath-Jarrow-Morton (HJM) interest rate model $\mathcal{M}$ and a parametrized family of finite dimensional forward rate curves $\mathcal{G}$, this paper provides a technique for projecting the infinite dimensional forward rate curve $r_{t}$ given by $\mathcal{M}$ onto the finite dimensional manifold $\mathcal{G}$.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.
Comments: To appear in the International Journal of Theoretical and Applied Finance
Subjects: Computational Engineering, Finance, and Science (cs.CE); Information Theory (cs.IT)
ACM classes: G.3
Cite as: arXiv:cs/0509028 [cs.CE]
  (or arXiv:cs/0509028v1 [cs.CE] for this version)

Submission history

From: Erhan Bayraktar [view email]
[v1] Sat, 10 Sep 2005 14:01:02 UTC (31 KB)