A Quantum Field Theory Term Structure Model Applied to Hedging

A Quantum Field Theory Term Structure Model Applied to Hedging

A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise fr...

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Bibliographic Details
Main Authors: WARACHKA, Mitchell Craig, Belal, Baaquie, Srikant, M.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2010
Subjects:
Bond portfolio
hedging
field theory model
variance minimization
Finance and Financial Management
Portfolio and Security Analysis
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/2695
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Institution: Singapore Management University
Language: English
Description
Summary:A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise from all forward rate models. Specifically, incorporating field theory into the term structure facilitates hedge parameters that reduce to their finite factor HJM counterparts under special correlation structures. Although investors are unable to perfectly hedge against an infinite number of term structure perturbations in a field theory model, empirical evidence using market data reveals the effectiveness of a low dimensional hedge portfolio.

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