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Testing the Heath-Jarrow-Morton/Ho-Lee Model of Interest Rate Contingent Claims Pricing
The Journal of Financial and Quantitative Analysis
Vol. 28, No. 4 (Dec., 1993), pp. 483-495
Published by: Cambridge University Press on behalf of the University of Washington School of Business Administration
Stable URL: http://www.jstor.org/stable/2331161
Page Count: 13
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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.
The Journal of Financial and Quantitative Analysis © 1993 University of Washington School of Business Administration