Re‐indexing the Heath, Jarrow and Morton term structure model and empirical evidence of forward function following a martingale

Abstract

Outlines Heath, Jarrow and Morton’s (1992) method (MJM) for modelling interest rates and refers to other research showing that although it is generally non‐Markov, this can be modified if the volatility structure depends on relative maturity term rather than calendar maturity date. Develops a re‐indexed MJM model, applies it to 1975‐1991 data on non‐callable US treasury bills, notes and bonds; and compares its goodness of fit with Jordan (1984). Finds the forward function consistent with constant parameters, that state variables can be identified from the cross‐section estimates and that they have zero mean first differences when analysed through time series. Concludes that the forward function follows a martingale and promises further research.