Abstract

In the present paper we discuss the relationship of no-arbitrage in Heath-Jarrow-Morton (H-J-M) model and no-arbitrage in the bond pricing partial differential equation approach. We show that the no-arbitrage condition of H-J-M translates, in terms of zero-coupon bonds, into the bond pricing equation. Conversely, we show that affine-yield solutions of the bond pricing equation, for the very general four-parameter short rate model, satisfy the H-J-M no-arbitrage condition without actually obtaining the solutions.

Citation details of the article

Journal: International Journal of Applied Mathematics
Journal ISSN (Print): ISSN 1311-1728
Journal ISSN (Electronic): ISSN 1314-8060
Volume: 29
Issue: 5
Year: 2016

DOI: 10.12732/ijam.v29i5.6

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