- Stochastic Interest Rates 261
These problems can be avoided if some middle-of-the-road solution is adopted.
Yet another alternative is to specify the dynamics of the entire curve of for-
ward rates. This determines the time evolution of the term structure, with the
initial term structure playing the role of initial data. This sounds conceptually
simple, but the model (the Heath–Jarrow–Morton model in continuous time
setting) is mathematically complex.
The literature on the subject is vast and expanding. We recommend that
the reader interested in pursuing this topic should look, for example, at
Pliska (1997), and Jarrow (1995) for the discrete time setting, or Bj ̈ork (1998)
and Chen (1996) for continuous time models.