The Term Structure of Interest Rates as a Random Field
Year: 2000
Type: article
Abstract: Forward rate dynamics are modeled as a random field. In contrast to multifactor models, random field models offer a parsimonious description of term structure dynamics, while eliminating the self-inconsistent practice of recalibration. The form of the drift of the instantaneous forward rate process necessary to preclude arbitrage under the risk-neutral measure is obtained. Forward risk-adjusted measures are identified and used to price a bond option when the forward volatility structure depends on the square root of the current spot rate. Several classes of tractable random field models are presented.
Source: Review of Financial Studies
DOI: 10.1093/rfs/13.2.365
Author: Robert S. Goldstein
Institution: The Ohio State University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3124436296