Abstract
I review how the theoretical modeling of the dynamics of forward rates in the context of derivatives pricing has evolved over time. I review the theoretical developments from the short rate models of the 1980s to the stochastic-volatility extensions of the SABR model. I argue that how the theory developed can be understood only by taking into account the institutional setting of derivatives trading and that the modeling choices were motivated to a surprisingly large extent by how the market evolved. I conclude with an assessment of which of these theoretical contributions have had a lasting and meaningful effect on the financial theory of asset pricing.
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