We study a finite{dimensional approach to the Heath Jarrow Morton model for interest rate and introduce a notion of approximate consistency for a family of functions in a deterministic and stochastic framework. This amounts to asking the decrease of the minimum distance in least squares sense. We start from a general linearly parameterized set of functions and extend the theory to a nonlinear Nelson Siegel family. Necessary and sufficient condition to have approximately consistency are given as well as a criterion of stability for the approximation.
Heat-Jarrow-Morton interest rate dynamics and approximately consistent forward rate curves
Piccoli B
2007
Abstract
We study a finite{dimensional approach to the Heath Jarrow Morton model for interest rate and introduce a notion of approximate consistency for a family of functions in a deterministic and stochastic framework. This amounts to asking the decrease of the minimum distance in least squares sense. We start from a general linearly parameterized set of functions and extend the theory to a nonlinear Nelson Siegel family. Necessary and sufficient condition to have approximately consistency are given as well as a criterion of stability for the approximation.File in questo prodotto:
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