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A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise from all forward rate models. Specifically, incorporating field theory into the term structure facilitates hedge parameters that reduce to their finite factor HJM counterparts under special correlation structures. Although investors are unable to perfectly hedge against an infinite number of term structure perturbations in a field theory model, empirical evidence using market data reveals the effectiveness of a low dimensional hedge portfolio.


This is an author-produced PDF of an article that later underwent peer review and was accepted for publication in International Journal of Theoretical and Applied Finance, volume 6, issue 5, in 2003. The definitive publisher-authenticated version may differ from this one and is available online at

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World Scientific Publishing


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