A guide on the implementation of the Heath-Jarrow-Morton Two-Factor Gaussian Short Rate Model (HJM-G2++)

  • In the literature, there are at least two equivalent two-factor Gaussian models for the instantaneous short rate. These are the original two-factor Hull White model (see [3]) and the G2++ one by Brigo and Mercurio (see [1]). Both these models first specify a time homogeneous two-factor short rate dynamics and then by adding a deterministic shift function '(·) fit exactly the initial term structure of interest rates. However, the obtained results are rather clumsy and not intuitive which means that a special care has to be taken for their correct numerical implementation.

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Author:S. Acar, K. Natcheva-Acar
Serie (Series number):Berichte des Fraunhofer-Instituts für Techno- und Wirtschaftsmathematik (ITWM Report) (170)
Document Type:Report
Language of publication:English
Year of Completion:2009
Year of Publication:2009
Publishing Institute:Fraunhofer-Institut für Techno- und Wirtschaftsmathematik
Date of the Publication (Server):2009/10/16
GND-Keyword:Hull White model; HJM; G2++ model
Faculties / Organisational entities:Fraunhofer (ITWM)
DDC-Cassification:5 Naturwissenschaften und Mathematik / 510 Mathematik
Licence (German):Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011