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Quantum Field Theory of Treasury Bonds

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  • Belal E. Baaquie

Abstract

The Heath-Jarrow-Morton (HJM) formulation of treasury bonds in terms of forward rates is recast as a problem in path integration. The HJM-model is generalized to the case where all the forward rates are allowed to fluctuate independently. The resulting theory is shown to be a two-dimensional Gaussian quantum field theory. The no arbitrage condition is obtained and a functional integral derivation is given for the price of a futures and an options contract.

Suggested Citation

  • Belal E. Baaquie, 1998. "Quantum Field Theory of Treasury Bonds," Papers cond-mat/9809199, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/9809199
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    References listed on IDEAS

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    1. Carl Chiarella & Nadima El-Hassan, 1997. "Evaluation of Derivative Security Prices in the Heath-Jarrow-Morton Framework as Path Integrals Using Fast Fourier Transform Techniques," Working Paper Series 72, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    3. D. P. Kennedy, 1997. "Characterizing Gaussian Models of the Term Structure of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 107-118, April.
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    Cited by:

    1. Andrew Matacz, 2000. "Path dependent option pricing: the path integral partial averaging method," Science & Finance (CFM) working paper archive 500034, Science & Finance, Capital Fund Management.

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