Research on the Heath-Jarrow-Morton (1992) term structure models so far has focused on the class having time-deterministic instantaneous forward rate volatility. In this case the forward rate is Markovian, even if the spot rate process is not. However, this Markovian feature can only be used...

The note shows that there is a non-negligible bias in using the futures rates as a proxy for the instantaneous forward rates in the estimation of forward rate models. It is therefore desirable to derive the evolution of observable rates, then use the distributional properties of this evolution...

The defaultable forward rate is modeled as a jump diffusion process within the Schonbucher (2000, 2003) general Heath, jarrow and Morton (1992) framework where jumps in the defaultable term structure f^d(t, T) cause jumps and defaults to the defaultable bond prices P^d(t, T). Within this...

This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process and within the Markovian HJM framework developed in Chiarella & Nikitopoulos (2003). Closed form solutions for the price of a bond option...

This paper considers the dynamics for interest rate processes within a multi-factor Heath, Jarrow and Morton (1992) specification. Despite the flexibility of and the notable advances in theoretical research about the HJM models, the number of empirical studies is still inadequate. This paucity...

We consider the joint dynamic of a basket of n-assets where each asset itself follows a SABR stochastic volatility model. Using the Markovian Projection methodology we approximate a univariate displaced diffusion SABR dynamic for the basket to price caps and floors in closed form. This enables...

In the years following the publication of Black and Scholes [7], numerous alternative models have been proposed for pricing and hedging equity derivatives. Prominent examples include stochastic volatility models, jump diffusion models, and models based on Levy processes. These all have their own...

Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated Wiener components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a continuous...

We consider a market consisting of multiple assets under jump-diffusion dynamics with European style options written on these assets. It is well-known that such markets are incomplete in the Harrison and Pliska sense. We derive a pricing relation by adopting a Radon-Nikodym derivative based on...

This paper builds upon the authors' previous work on transformation of the Heath-Jarrow-Morton (HJM) model of the term structure of interest rates to state space form for a fairly general class of volatility specification including stochastic variables. Estimation of this volatility function is...