HJM model was developed in early 1992 by Heath et al.
[r.sub.t] = f(t, t) and f(t, T) satisfies HJM model (9).
For example, Cairns, Blake, and Dowd (2006) consider a two-factor model; Bauer, Boerger, and Russ (2008) use a model that is parallel to the HJM model
for interest rates.
Keywords: Term structure; Interest rate; Volatility; HJM model; Cap pricing; Kalman Filter
Finally, if we model forward rates as log-normal processes the HJM model will explode (2).
Su has adopted the CIR model, RSCIR model, and no-arbitrage HJM model
to study the term structure of SHBOR and the dynamics of its risk premium.
Pricing Asian Interest Rate Options with a Three-Factor HJM Model. Revista Brasileira de Financas, 8, 9-23.
PCA Based Calibration of an HJM Model. Quaderno IAC.
(2010) implemented the HJM model (Heath et al, 1992) for ID options, which generalizes both the Vasicek and CIR models.
Pricing Asian Interest Rate Options with a Three-Factor HJM Model. Brazilian Review of Finance, 8, 9-23.
Alternatively, the HJM model
considers the forward-rate as the basic ingredient in modeling the interest rate evolution.
Reduction of forward rate dependent HJM models
to Markovian form: Pricing European bond options.