Generalizations of Ho-Lee's binomial interest rate model I: from one- to multi-factor
Probability
2008-12-02 v1 Pricing of Securities
Abstract
In this paper a multi-factor generalization of Ho-Lee model is proposed. In sharp contrast to the classical Ho-Lee, this generalization allows for those movements other than parallel shifts, while it still is described by a recombining tree, and is stationary to be compatible with principal component analysis. Based on the model, generalizations of duration-based hedging are proposed. A continuous-time limit of the model is also discussed.
Keywords
Cite
@article{arxiv.math/0606183,
title = {Generalizations of Ho-Lee's binomial interest rate model I: from one- to multi-factor},
author = {Jirô Akahori and Hiroki Aoki and Yoshihiko Nagata},
journal= {arXiv preprint arXiv:math/0606183},
year = {2008}
}
Comments
34 pages, 3 figures