hard · Quantitative Finance stochastic
In the Heath-Jarrow-Morton (HJM) framework for modeling the term structure of interest rates, what is the significance of the 'HJM drift condition'?
- The yield curve implied by the model must always be upward sloping over time.
- The volatility structure of forward rates completely determines their risk-neutral drift.
- Forward rates within the framework must always follow a strictly mean-reverting process.
- Interest rates are structurally prohibited from ever becoming negative under this framework.
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