A Quantum Field Theory Term Structure Model Applied to Hedging
A quantum field theory generalization, Baaquie , of the Heath, Jarrow and Morton (HJM)  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.
Bond portfolio, hedging, field theory model, variance minimization
Finance and Financial Management | Portfolio and Security Analysis
International Journal of Theoretical and Applied Finance
WARACHKA, Mitchell Craig; Belal, Baaquie; and Srikant, M..
A Quantum Field Theory Term Structure Model Applied to Hedging. (2010). International Journal of Theoretical and Applied Finance. 6, (5), 443-467. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2695