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Generalizations of Ho–Lee’s binomial interest rate model I: from one- to multi-factor

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  • Jirô Akahori

    ()

  • Hiroki Aoki

    ()

  • Yoshihiko Nagata

    ()

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 a process with stationary independent increments 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. Copyright Springer Science+Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s10690-007-9039-8
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Bibliographic Info

Article provided by Springer in its journal Asia-Pacific Financial Markets.

Volume (Year): 13 (2006)
Issue (Month): 2 (June)
Pages: 151-179

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Handle: RePEc:kap:apfinm:v:13:y:2006:i:2:p:151-179

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Web page: http://springerlink.metapress.com/link.asp?id=102851

Related research

Keywords: Ho–Lee model; Duration; Multi-factor; Recombining tree; Stationary increments; Forward rate; Drift condition; 91B28; 60G50; G12;

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  1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  2. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  4. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
  5. Inui, Koji & Kijima, Masaaki, 1998. "A Markovian Framework in Multi-Factor Heath-Jarrow-Morton Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 423-440, September.
  6. Li Chen & Damir Filipović & H. Vincent Poor, 2004. "Quadratic Term Structure Models For Risk-Free And Defaultable Rates," Mathematical Finance, Wiley Blackwell, vol. 14(4), pages 515-536.
  7. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  8. Heath, David & Jarrow, Robert & Morton, Andrew, 1990. "Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 419-440, December.
  9. Jirô Akahori, 2005. "A discrete Itô calculus approach to He’s framework for multi-factor discrete markets," Asia-Pacific Financial Markets, Springer, vol. 12(3), pages 273-287, September.
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