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Lattice Models for Pricing American Interest Rate Claims

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Author Info
 Li, Anlong
Ritchken, Peter
Sankarasubramanian, L
Abstract

This article establishes efficient lattice algorithms for pricing American interest-sensitive claims in the Heath, Jarrow, and Morton paradigm under the assumption that the volatility structure of forward rates is restricted to a class that permits a Markovian representation of the term structure. The class of volatilities that permits this representation is quite large and imposes no severe restrictions on the structure for the spot rate volatility. The algorithm exploits the Markovian property of the term structure and permits the efficient computation of all types of interest rate claims. Specific examples are provided. Copyright 1995 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 50 (1995)
Issue (Month): 2 (June)
Pages: 719-37
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Handle: RePEc:bla:jfinan:v:50:y:1995:i:2:p:719-37

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  1. Thomas Busch & Bent Jesper Christensen & Morten Ørregaard Nielsen, 2006. "The Information Content of Treasury Bond Options Concerning Future Volatility and Price Jumps," Working Papers 1188, Queen's University, Department of Economics. [Downloadable!]
  2. Patrick S. Hagan, Diana E. Woodward, 1999. "Markov interest rate models," Applied Mathematical Finance, Taylor and Francis Journals, vol. 6(4), pages 233-260, December. [Downloadable!] (restricted)
  3. Marat Kramin & Saikat Nandi & Alexander Shulman, 2008. "A multi-factor Markovian HJM model for pricing American interest rate derivatives," Review of Quantitative Finance and Accounting, Springer, vol. 31(4), pages 359-378, November. [Downloadable!] (restricted)
  4. Carl Chiarella & Nadima El-Hassan, 1999. "Pricing American Interest Rate Options in a Heath-Jarrow-Morton Framework Using Method of Lines," Research Paper Series 12, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  5. Riccardo Rebonato, Ian Cooper, 1998. "Coupling backward induction with Monte Carlo simulations: a fast Fourier transform (FFT) approach," Applied Mathematical Finance, Taylor and Francis Journals, vol. 5(2), pages 131-141, June. [Downloadable!] (restricted)
  6. Jirô Akahori, 1999. "On the Quasi Gaussian Interest Rate Models," Asia-Pacific Financial Markets, Springer, vol. 6(1), pages 3-6, January. [Downloadable!] (restricted)
  7. Fabio Mercurio, Juan M. Moraleda, 2001. "A family of humped volatility models," European Journal of Finance, Taylor and Francis Journals, vol. 7(2), pages 93-116, June. [Downloadable!] (restricted)
  8. Robert R. Bliss & Peter Ritchken, 1995. "Empirical tests of two state-variable HJM models," Working Paper 95-13, Federal Reserve Bank of Atlanta. [Downloadable!]
  9. Mark Broadie & Jérôme B. Detemple, 1996. "Recent Advances in Numerical Methods for Pricing Derivative Securities," CIRANO Working Papers 96s-17, CIRANO. [Downloadable!]
  10. Marat Kramin & Timur Kramin & Stephen Young & Venkat Dharan, 2005. "A Simple Induction Approach and an Efficient Trinomial Lattice for Multi-State Variable Interest Rate Derivatives Models," Review of Quantitative Finance and Accounting, Springer, vol. 24(2), pages 199-226, January. [Downloadable!] (restricted)
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