hard · Quantitative Finance stochastic
In the context of the HJM framework, what is the primary lesson regarding the drift of the forward rate curve?
- The drift can be freely set independently of volatility to match investor expectations.
- The drift is always identically zero under the risk-neutral pricing measure by assumption.
- The drift only depends on the model's long-run mean reversion level parameter.
- The drift is entirely determined by the volatility structure to ensure no-arbitrage.
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