The Estimation of the Heath-Jarrow-Morton Model by Use of Kalman Filtering Techniques
A fairly flexible functional form for the forward rate volatility is applied to the Heath—Jarrow—Morton model of the term structure of interest rates to reduce the system dynamics to Markovian form. The resulting stochastic dynamic system is cast into a form suitable for estimation by use of nonlinear filtering methodology. The technique is applied to 90 day bank bill and 3 year treasury bond data in the Australian market.
KeywordsTerm Structure Forward Rate Bond Price Markovian System Volatility Function
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