The Heath–Jarrow–Morton Framework

Carl Chiarella*, Xue Zhong He, Christina Sklibosios Nikitopoulos

*Corresponding author for this work

Research output: Chapter in Book or Report/Conference proceedingChapterpeer-review


Interest rate modelling can also be performed by starting from the dynamics of the instantaneous forward rate. As we shall see the dynamics of all other quantities of interest can then be derived from it. This approach has its origin in Ho and Lee (J Finance XLI:1011–1029, 1986) but was most clearly articulated in Heath et al. (Econometrica 60(1):77–105, 1992a), to which we shall subsequently refer as Heath–Jarrow–Morton. In this framework, the condition of no riskless arbitrage results in the drift coefficient of the forward rate dynamics being expressed in terms of the forward rate volatility function. The major weakness in implementing the Heath–Jarrow–Morton approach is that the spot rate dynamics are usually path dependent (non-Markovian). We consider a class of functional forms of the forward rate volatility that allow the model to be reduced to a finite dimensional Markovian system of stochastic differential equations. This class contains some important models considered in the literature.

Original languageEnglish
Title of host publicationDynamic Modeling and Econometrics in Economics and Finance
PublisherSpringer Science and Business Media Deutschland GmbH
Number of pages40
Publication statusPublished - 2015
Externally publishedYes

Publication series

NameDynamic Modeling and Econometrics in Economics and Finance
ISSN (Print)1566-0419
ISSN (Electronic)2363-8370


  • Bond Price
  • Forward Rate
  • Interest Rate
  • Spot Rate
  • Stochastic Differential Equation


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