Heath-Jarrow-Morton Model

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Heath-Jarrow-Morton Model

A model that uses forward interest rates to determine prices for securities that are affected by changes in interest rates. The model is quite complex and used mainly by arbitrageurs. It may also be used in asset liability management.
References in periodicals archive ?
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.
Finally, if we model forward rates as log-normal processes the HJM model will explode (2).
So, by construction, the HJM model fits the initial term structure exactly.
In order to price Euribor interest rate caps, we estimate a restrictive HJM model via the Kalman filter.
In the next section, we show how the one-factor HJM model can be expressed in a state space form and can be estimated by the Kalman filter technique.
The HJM models are estimated with specific volatility functions to ensure that the interest rate process is Markovian, i.