TY - JOUR
T1 - Small-noise limit of the quasi-Gaussian log-normal HJM model
AU - Pirjol, Dan
AU - Zhu, Lingjiong
N1 - Publisher Copyright:
© 2016 Elsevier B.V.
PY - 2017/1/1
Y1 - 2017/1/1
N2 - 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.
AB - 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.
KW - Explosion
KW - HJM model
KW - Ordinary differential equations
KW - Stochastic modeling
UR - http://www.scopus.com/inward/record.url?scp=85006852924&partnerID=8YFLogxK
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U2 - 10.1016/j.orl.2016.10.012
DO - 10.1016/j.orl.2016.10.012
M3 - Article
AN - SCOPUS:85006852924
SN - 0167-6377
VL - 45
SP - 6
EP - 11
JO - Operations Research Letters
JF - Operations Research Letters
IS - 1
ER -