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Two extensions for fitting discrete time term structure models with normally distributed factors


  • Senay Ağca
  • Don Chance


This paper provides extensions to procedures for the implementation of two well-known term structure models. In the first part, a misleading implication given in two textbooks concerning the ability to fit a Ho-Lee type term structure tree through trial and error is corrected, and it is shown that the tree can be fitted precisely with a simple and easily programmable formula. In the second part, a previously published result that obtains the drift for a single-factor discrete time Heath-Jarrow-Morton model is extended to a multi-factor world. In both cases numerical examples are provided.

Suggested Citation

  • Senay Ağca & Don Chance, 2004. "Two extensions for fitting discrete time term structure models with normally distributed factors," Applied Mathematical Finance, Taylor & Francis Journals, vol. 11(3), pages 187-205.
  • Handle: RePEc:taf:apmtfi:v:11:y:2004:i:3:p:187-205 DOI: 10.1080/1350486042000228717

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    References listed on IDEAS

    1. Lucas, Andre & Klaassen, Pieter & Spreij, Peter & Straetmans, Stefan, 2001. "An analytic approach to credit risk of large corporate bond and loan portfolios," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1635-1664, September.
    2. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March.
    3. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    4. Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, August.
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