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Continuous-Time Limits in the Generalized Ho-Lee Framework under the Forward Measure

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  • Sommer, Daniel
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    Abstract

    The 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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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb276.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 276.

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    Length: pages
    Date of creation: Apr 1994
    Date of revision: Jul 1996
    Handle: RePEc:bon:bonsfb:276

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: Ho/Lee model; forward measure; continuous time limit; trinomial and quattronomial models.;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. 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.
    2. 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, Econometric Society, vol. 60(1), pages 77-105, January.
    3. Sandmann, K. & E. Schl�gl, 1993. "Zustandspreise und die Modellierung des Zinsänderungsrisikos," Discussion Paper Serie B, University of Bonn, Germany 238, University of Bonn, Germany.
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    Cited by:
    1. 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.
    2. Markus Leippold & Liuren Wu, 1999. "The Potential Approach to Bond and Currency Pricing," Finance, EconWPA 9903004, EconWPA.

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