Hedging in Field Theory Models of the Term Structure

Details Hedging in Field Theory Models of the Term Structure Hedging in Field Theory Models of the Term Structure

2002-09-15

arxiv.org/abs/cond-mat/0209343v1

Phys. Rev. E 69, 036130 (2004)

Physics

Condensed Matter

Statistical Mechanics

18 figures, Invited Talk, International Econophysics Conference, Bali, 28-31 August 2002

Scientific paper

10.1103/PhysRevE.69.036130

We use path integrals to calculate hedge parameters and efficacy of hedging in a quantum field theory generalization of the Heath, Jarrow and Morton (HJM) term structure model which parsimoniously describes the evolution of imperfectly correlated forward rates. We also calculate, within the model specification, the effectiveness of hedging over finite periods of time. We use empirical estimates for the parameters of the model to show that a low dimensional hedge portfolio is quite effective.

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