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Testing the Heath-Jarrow-Morton/Ho-Lee Model of Interest Rate Contingent Claims Pricing

Bjorn Flesaker
The Journal of Financial and Quantitative Analysis
Vol. 28, No. 4 (Dec., 1993), pp. 483-495
DOI: 10.2307/2331161
Stable URL: http://www.jstor.org/stable/2331161
Page Count: 13
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Testing the Heath-Jarrow-Morton/Ho-Lee Model of Interest Rate Contingent Claims Pricing
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Abstract

This paper presents empirical tests of the constant volatility version of the Heath, Jarrow, and Morton model, which is also the continuous time limit of the Ho and Lee model. Using a generalized method of moments (GMM) test on three years of daily data for Eurodollar futures and futures options, the model can be rejected for most subperiods. Various biases in the fitted option prices relative to the market prices are documented through a regression study. The small sample properties and power of the GMM framework to this setting are also studied through simulations.

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