Interest-rate simulation under the real-world measure within a Gaussian HJM framework

Abstract

This paper studies an interest-rate simulation for risk management under the real-world measure. First, this paper proposes a method to estimate the market price of risk from historical data in a Gaussian Heath, Jarrow, and Morton framework. Next, properties of the simulation are examined in connection with historical data. Finally, the market price of risk is roughly interpreted in regard to the historical change in interest rates. These results are explained through numerical examples.