# Tag Info

3

If we take your model literally (with the correction that I suggested as a comment), then there exists no (semi-)closed form, IMHO, that you can use for asset pricing. What you could do is then to make the model a bit simpler or to simulate. Simulation This is the nasty part. Based on your model, you simulate a very large number of the discount factor(s) and ...

3

Just an addendum to the above answers and comments: The main decision is whether to use single or multiple factor dynamics. LMM models term forward rates. HJM models instantaneous forward rates. The main disadvantage of HJM, high-dimensional stochastic process as underlying, was overcome by Cheyette, back in 1994, by restricting the general HJM model to a ...

6

I am not sure if you can classify it like that. Mind you, I never wrote a book. I'll write what I know below and you can decide if the classification makes sense or not. 1 ) STIR: as the term indicates - short term like Eurodollar frequently modelled with Black or Bachelier (normal) model. HW1F is also a short rate model. 2 ) HJM is a framework (M is not ...

1

Just adding my two cents. Without taking the logarithm of the price, the Ito's Lemma should result in: $d p(t,T) = \left( \partial_t A(t,T) - \partial_t B(t,T) r + \frac{1}{2}\sigma^2B(t,T)^2 \right)p(t,T) dt - B(t,T) p(t,T) dr_t$ substituting now the partial derivatives and the differential $dr_t$, and simplifying the identical terms: $d p(t,T) = r_t p(t,T) ... 1 You can simply use Ito's lemma under the risk neutral measure$Q$.For the log-bond price$p(t,T)$this gives $$dp(t,T)=(A_t(t,T)-B_t(t,T)r_t)dt-B(t,T)dr_t$$ $$=[A_t(t,T)-(B_t(t,T)+B(t,T)a)r_t]dt-B(t,T)\sigma dW_t$$ Here$A_t(t,T)$and$B_t(t,T)$are partial derivatives wrt$t$and$W_t$is Wiener process under$Q\$.

Top 50 recent answers are included