This paper is a study of the term structure of interest rates based on the Heath-Jarrow-Morton (HJM) models with Hull-White volatility function. Under fast mean-reverting stochastic volatility, we obtain an analytic formula for an approximate bond price with estimated error using a Markovian transform method combined with a singular perturbation method. The stochastic volatility correction effect against time-to-maturity is revealed so that it can capture more of the complexities of the interest rate term structure.
Bibliographical noteFunding Information:
We thank referees for valuable comments and suggestions to improve the paper. The research of J.-H. Kim was supported by the National Research Foundation of Korea NRF-2013R1A1A2A10006693 and the work of M.-K. Lee was supported by Brain Korea 21 plus Mathematical Science Team for Global Women Leaders at Ewha Womans University
All Science Journal Classification (ASJC) codes
- Physics and Astronomy(all)