An extended Heath–Jarrow–Morton risk-neutral drift

Abstract

Using a finite dimensional Hilbert space framework, this work proposes a new derivation of the HJM [D. Heath, R. Jarrow, A. Morton, Bond pricing and the term structure of interest rates: A new methodology for contingent claims valuation, Econometrica 60 (1992) 77–105] risk-neutral drift that takes into account nonzero instantaneous correlations between factors. The results obtained generalize the original HJM risk-neutral drift and provide an approach by which interest rate derivatives can be priced using functions of directly observable factors.