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Efficient Calibration of Trinomial Trees for One-Factor Short Rate Models

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  • Markus Leippold
  • Zvi Wiener

Abstract

In this paper we propose a computationally efficient implementation of general one factor short rate models with a trinomial tree. We improve the Hull–White’s procedure to calibrate the tree to bond prices by circumventing the forward rate induction and numerical root search algorithms. Our calibration procedure is based on forward measure changes and is as general as the Hull–White procedure, but it offers a more efficient and flexible method of constructing a trinomial term structure model. It can be easily implemented and calibrated to both prices and volatilities. Copyright Kluwer Academic Publishers 2005

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  • Markus Leippold & Zvi Wiener, 2005. "Efficient Calibration of Trinomial Trees for One-Factor Short Rate Models," Review of Derivatives Research, Springer, vol. 7(3), pages 213-239, October.
    • Handle: RePEc:kap:revdev:v:7:y:2005:i:3:p:213-239
    DOI: 10.1007/s11147-004-4810-8
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    References listed on IDEAS

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    Cited by:

    1. Zura Kakushadze, 2015. "Coping with Negative Short-Rates," Papers 1502.06074, arXiv.org, revised Aug 2015.

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