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Finance and Stochastics

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18.05.2018

Long-term factorization in Heath–Jarrow–Morton models

Erschienen in: Finance and Stochastics | Ausgabe 3/2018

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Abstract

The long-term factorization decomposes the stochastic discount factor (SDF) into discounting at the rate of return on the long bond and a martingale that defines a long-term forward measure. We establish sufficient conditions for existence of the long-term factorization in HJM models. A condition on the forward rate volatility ensures existence of the long bond volatility. This yields existence of the long bond and convergence of \(T\)-forward measures to the long forward measure. It contrasts with the familiar risk-neutral factorization that decomposes the SDF into discounting at the short rate and a martingale defining the risk-neutral measure.

Vorheriger Artikel Non-implementability of Arrow–Debreu equilibria by continuous trading under volatility uncertainty

Nächster Artikel Explosion in the quasi-Gaussian HJM model

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Titel: Long-term factorization in Heath–Jarrow–Morton models
Publikationsdatum: 18.05.2018
Erschienen in: Finance and Stochastics / Ausgabe 3/2018
Print ISSN: 0949-2984
Elektronische ISSN: 1432-1122
DOI: https://doi.org/10.1007/s00780-018-0365-7

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