Next, we work with a bond market where the bond prices are represented by Ito processes. For this, the market price of risk is introduced to ensure the arbitrage-free condition in the market. The market price of risk widely plays an important role in traditional interest-rate models, as an example, which will appear in the basic theory of the HJM model in Chapter 4. The estimation of the market price of risk is the most important subject of this book and is studied after Chapter 6.
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