TY - JOUR
T1 - The term structure of interest rates as a random field
AU - Goldstein, Robert S.
PY - 2000/1/1
Y1 - 2000/1/1
N2 - Forward rate dynamics are modeled as a random field. In contrast to multifactor models, random field models offer a parsimonious description of term structure dynamics, while eliminating the self-inconsistent practice of recalibration. The form of the drift of the instantaneous forward rate process necessary to preclude arbitrage under the risk-neutral measure is obtained. Forward risk-adjusted measures are identified and used to price a bond option when the forward volatility structure depends on the square root of the current spot rate. Several classes of tractable random field models are presented.
AB - Forward rate dynamics are modeled as a random field. In contrast to multifactor models, random field models offer a parsimonious description of term structure dynamics, while eliminating the self-inconsistent practice of recalibration. The form of the drift of the instantaneous forward rate process necessary to preclude arbitrage under the risk-neutral measure is obtained. Forward risk-adjusted measures are identified and used to price a bond option when the forward volatility structure depends on the square root of the current spot rate. Several classes of tractable random field models are presented.
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U2 - 10.1093/rfs/13.2.365
DO - 10.1093/rfs/13.2.365
M3 - Article
AN - SCOPUS:0034390008
VL - 13
SP - 365
EP - 384
JO - Review of Financial Studies
JF - Review of Financial Studies
SN - 0893-9454
IS - 2
ER -