Consistency Problems for Heath-Jarrow-Morton Interest Rate Models
Bond markets differ in one fundamental aspect from standard stock markets. While the latter are built up to a finite number of trade assets, the underlying basis of a bond market is the entire term structure of interest an infinite-dimensional variable which is not directly observable. On the empirical side, this necessitates curve-fitting methods for the daily estimation of the term structure. Pricing models, on the other hand, are usually built upon stochastic factors representing the term structure in a finite-dimensional state space. Written for readers with knowledge in mathematical finance (in particular interest rate theory) and elementary stochastic analysis, this research monograph has threefold to bring together estimation methods and factor models for interest rates, to provide appropriate consistency conditions and to explore some important examples.
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