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Arbitrage Theory in Continuous Time$
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Tomas Björk

Print publication date: 2004

Print ISBN-13: 9780199271269

Published to Oxford Scholarship Online: October 2005

DOI: 10.1093/0199271267.001.0001

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Forward Rate Models

Forward Rate Models

Chapter:
(p.340) 23 Forward Rate Models
Source:
Arbitrage Theory in Continuous Time
Author(s):

Tomas Björk (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199271267.003.0023

The drawbacks associated with short rate models have prompted various authors to propose models that use more than one state variable. In the method proposed by Heath-Jarrow-Morton (HJM), the entire forward rate curve is chosen as the (infinite dimensional) state variable. This chapter discusses the HJM framework, martingale modelling, and the Musiela parameterization. Practice exercises are included.

Keywords:   short rate models, forward rate models, Heath-Jarrow-Morton, martingale modelling, Musiela parameterization

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