Empirical investigation of a quantum field theory of forward rates

Details Empirical investigation of a quantum field theory of forward rates Empirical investigation of a quantum field theory of forward rates

2001-06-16

arxiv.org/abs/cond-mat/0106317v2

Physics

Condensed Matter

Statistical Mechanics

6 figures

Scientific paper

A new test of a wide class of interest rate models is proposed and applied to a recently developed quantum field theoretic model and the industry standard Heath-Jarrow-Morton model. This test is independent of the volatility function unlike other tests previously proposed in the literature. It is found that the HJM model is inconsistent with the data while the quantum field theoretic model is in significant agreement with data. We also show that a portion of the spread between long and short term interest rates is explicable in terms of this model.

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