Generalizations of Ho–Lee’s binomial interest rate model I: from one- to multi-factor
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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Volume (Year): 13 (2006)
Issue (Month): 2 (June)
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