Continuous-Time Limits in the Generalized Ho-Lee Framework under the Forward Measure
AbstractThe forward measure in the discrete time Ho/Lee model is derived and passages to the continuous time limit are carried out under this measure. In particular the continuous time valuation formula for call options on zero coupon bonds is obtained as a limit of its discrete time equivalent as well as the continuous time distribution of the continuously compounded short rate. Finally it is shown that the trinomial and quattronomial generalizations of the Ho/Lee model by Bühler and Schulze are essentially equivalent to the Ho/Lee model as concernes their discrete time properties and their continuous time limits.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 276.
Date of creation: Apr 1994
Date of revision: Jul 1996
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Ho/Lee model; forward measure; continuous time limit; trinomial and quattronomial models.;
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- Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, American Finance Association, vol. 41(5), pages 1011-29, December.
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- Das, Sanjiv Ranjan, 1998. "A direct discrete-time approach to Poisson-Gaussian bond option pricing in the Heath-Jarrow-Morton model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(3), pages 333-369, November.
- Markus Leippold & Liuren Wu, 1999. "The Potential Approach to Bond and Currency Pricing," Finance, EconWPA 9903004, EconWPA.
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