Factors’ Correlation in the Heath–Jarrow–Morton Interest Rate Model

We propose a new derivation of the Heath–Jarrow–Morton risk-neutral drift restriction that takes into account nonzero instantaneous correlations between factors. The result allows avoiding the orthogonalization of factors and provides an approach by which interest rate derivatives can be priced by preserving the economic meaning of each underlying factor. An application is given for the term structure of creditrisky bonds, driven by two correlated factors — the risk-free forward rate and the forward credit spreads