English, Article, Journal or magazine article edition: Lognormality of Rates and Term Structure Models Goldys, B.; M. Musiela; D. Sondermann

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Lognormality of Rates and Term Structure Models
Author
  • Goldys, B.
  • M. Musiela
  • D. Sondermann
Physical Description
  • preprint
Notes
  • A term structure model with lognormal type volatility structure is proposed. The Heath, Jarrow and Morton (HJM) framework, coupled with the theory of stochastic evolution equations in infinite dimensions, is used to show that the resulting rates are well defined (they do not explode) and remain positive. They are bounded from below and above by lognormal processes. The model can be used to price and hedge caps, swaptions and other interest rate and currency derivatives including the Eurodollar futures contract, which requires integrability of one over zero coupon bond. This extends results obtained by Sandmann and Sondermann (1993), (1994) for Markovian lognormal short rates to (non-Markovian) lognormal forward rates.
  • Term structure of interest rates, lognormal volatility structure, Heath, Jarrow and Morton models.
  • RePEc:bon:bonsfb:394
Language
  • English
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