The Stochastic String Model as a Unifying Theory of the Term Structure of Interest Rates

53 Pages Posted: 28 May 2014 Last revised: 5 Nov 2014

See all articles by Alberto Bueno-Guerrero

Alberto Bueno-Guerrero

IES Francisco Ayala

Manuel Moreno

University of Castilla-La Mancha

Javier F. Navas

Universidad Pablo de Olavide

Date Written: October 28, 2014

Abstract

We present the stochastic string model of Santa-Clara and Sornette (2001), as reformulated by Bueno-Guerrero et al. (2014), as a unifying theory of the continuous-time modeling of the term structure of interest rates. We provide several new results, such as: a) an orthogonality condition for the volatilities in the Heath, Jarrow, and Morton (1992) (HJM) model, b) the interpretation of multi-factor HJM models as approximations to a full infinite-dimensional model, c) a result of consistency based on Hilbert spaces, and d) a theorem for option valuation.

Keywords: Stochastic string, Continuous-time process, Multi-factor model, Option pricing, Term structure

JEL Classification: C38, C60, E43, G13

Suggested Citation

Bueno-Guerrero, Alberto and Moreno Fuentes, Manuel and Navas, Javier F., The Stochastic String Model as a Unifying Theory of the Term Structure of Interest Rates (October 28, 2014). Available at SSRN: https://ssrn.com/abstract=2438676 or http://dx.doi.org/10.2139/ssrn.2438676

Alberto Bueno-Guerrero (Contact Author)

IES Francisco Ayala ( email )

Av Francisco Ayala, 0
Granada, 18014
Spain

Manuel Moreno Fuentes

University of Castilla-La Mancha ( email )

Cobertizo San Pedro Martir s/n
Toledo, Toledo 45071
Spain

Javier F. Navas

Universidad Pablo de Olavide ( email )

Ctra. de Utrera, Km.1
41013 Seville
Spain

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