Interest Rate Models II

There are a range of issues which must be considered by users when selecting an interest rate model. It is important to remain focused on the practical requirements of interest rate modelling. There is a category of models that attempts to describe the jump feature of asset prices and interest rates. The Heath-Jarrow-Morton (HJM) model uses the current yield curve and forward rate curve, and then specifies a continuous time stochastic process to describe the evolution of the yield curve over a specified time period. The HJM model describes a process whereby the whole yield curve evolves simultaneously, in accordance with a set of volatility term structures. In seeking to develop a model for the entire term structure, the requirement is to model the behaviour of the entire forward yield curve that is the behaviour of the forward short rate for all forward dates.