The Term Structure of Interest Rates under Heath-Jarrow-Morton Models with Fast Mean-Reverting Stochastic Volatility

Sang Hyeon Park; Min Ku Lee; Jeong Hoon Kim

doi:10.1142/S0219477516500140

The Term Structure of Interest Rates under Heath-Jarrow-Morton Models with Fast Mean-Reverting Stochastic Volatility

Sang Hyeon Park, Min Ku Lee, Jeong Hoon Kim

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

Abstract

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.

Original language	English
Article number	1650014
Journal	Fluctuation and Noise Letters
Volume	15
Issue number	2
DOIs	https://doi.org/10.1142/S0219477516500140
Publication status	Published - 2016 Jun 1

Bibliographical note

Funding 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

Mathematics(all)
Physics and Astronomy(all)

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abstract = "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.",

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