Small-noise limit of the quasi-Gaussian log-normal HJM model

Dan Pirjol, Lingjiong Zhu

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

Quasi-Gaussian HJM models are a popular approach for modeling the dynamics of the yield curve. This is due to their low dimensional Markovian representation, which greatly simplifies their numerical implementation. We present a qualitative study of the solutions of the quasi-Gaussian log-normal HJM model. Using a small-noise deterministic limit we show that the short rate may explode to infinity in finite time. This implies the explosion of the Eurodollar futures prices in this model. We derive explicit explosion criteria under mild assumptions on the shape of the yield curve.

Original languageEnglish
Pages (from-to)6-11
Number of pages6
JournalOperations Research Letters
Volume45
Issue number1
DOIs
StatePublished - 1 Jan 2017

Keywords

  • Explosion
  • HJM model
  • Ordinary differential equations
  • Stochastic modeling

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