Modeling
the Volatility of the Heath-Jarrow-Morton Model:
A Multi-factor GARCH Analysis
by
Anjun Zhou
Assistant Professor
School of Management
SUNY Binghamton
Abstract
Based on the nonparametric study of Pearson and Zhou (1999), a parametric
HJM model is developed for the forward rate volatility. It allows the volatility
of the forward rate with different maturities to react in a different way
with the level of forward rate and the forward spread. Specifically, the
proposed forward rate volatility function is imbedded into GARCH family
models and compared with several widely used HJM volatility specifications.
It is shown that the proposed volatility specification performs the best.
It is also confirmed that the volatility of forward rate with different
maturities depends on the forward rate and the forward spread in a different
way.
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