Forward Rate Dependent Markovian Transformation of the Heath-Jarrow-Morton Term Structure Model

Abstract

In this paper, a class of forward rate dependent Markovian transformations of the Heath-larrow-Morton [16] term structure model are obtained by considering volatility processes that are solutions of linear ordinary differential equations. These transformations generalise the Markovian systems obtained by Carverhill [8], Ritchken and Sankarasubramanian [20], Bhar and Chiarella [I], and Inui and Kijima [18], and also generalise the bond price formulae obtained therein.