Title

A Quantum Field Theory Term Structure Model Applied to Hedging

Publication Type

Journal Article

Publication Date

3-2010

Abstract

A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] 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.

Keywords

Bond portfolio, hedging, field theory model, variance minimization

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

International Journal of Theoretical and Applied Finance

Volume

6

Issue

5

First Page

443

Last Page

467

ISSN

0219-0249

Identifier

10.1142/S0219024903001980

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