A Class of Stochastic Volatility HJM Interest Rate Models

12 Pages Posted: 9 May 2004

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

David B. Colwell

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Oh Kang Kwon

The University of Sydney - Discipline of Finance

Abstract

This paper considers a class of stochastic volatility HJM term structure models with explicit finite dimensional realisations. The resulting bond market is arbitrage free but incomplete resulting in a non-unique martingale measure. Nevertheless, the market price of risk is partially determined by the forward rate drift and volatility. Numerical simulation for bond and bond option prices are included to illustrate the effect of stochastic volatility on these prices.

Suggested Citation

Chiarella, Carl and Colwell, David B. and Kwon, Oh Kang, A Class of Stochastic Volatility HJM Interest Rate Models. EFMA 2004 Basel Meetings Paper, Available at SSRN: https://ssrn.com/abstract=492902 or http://dx.doi.org/10.2139/ssrn.492902

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

David B. Colwell

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+61 (2) 9385 5851 (Phone)
+61 (2) 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Oh Kang Kwon

The University of Sydney - Discipline of Finance ( email )

Discipline of Finance
Codrington Building H69
The University of Sydney, NSW 2006
Australia