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The Term Structure Of Interest Rates As A Gaussian Random Field

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  • D. P. Kennedy

Abstract

A simple model of the term structure of interest rates is introduced in which the family of instantaneous forward rates evolves as a continuous Gaussian random field. A necessary and sufficient condition for the associated family of discounted zero‐coupon bond prices to be martingales is given, permitting the consistent pricing of interest rate contingent claims. Examples of the pricing of interest‐rate caps and the situation when the Gaussian random field may be viewed as a deterministic time change of the standard Brownian sheet are discussed.

Suggested Citation

  • D. P. Kennedy, 1994. "The Term Structure Of Interest Rates As A Gaussian Random Field," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 247-258, July.
    • Handle: RePEc:bla:mathfi:v:4:y:1994:i:3:p:247-258
    DOI: 10.1111/j.1467-9965.1994.tb00094.x
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