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Generalizations of Ho-Lee's binomial interest rate model I: from one- to multi-factor

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  • Jir^o Akahori
  • Hiroki Aoki
  • Yoshihiko Nagata

Abstract

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 stationary 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.

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  • Jir^o Akahori & Hiroki Aoki & Yoshihiko Nagata, 2006. "Generalizations of Ho-Lee's binomial interest rate model I: from one- to multi-factor," Papers math/0606183, arXiv.org.
    • Handle: RePEc:arx:papers:math/0606183
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    Cited by:

    1. Young Shin Kim & Stoyan Stoyanov & Svetlozar Rachev & Frank J. Fabozzi, 2017. "Another Look at the Ho-Lee Bond Option Pricing Model," Papers 1712.06664, arXiv.org.
    2. Laurini, Márcio Poletti & Ohashi, Alberto, 2015. "A noisy principal component analysis for forward rate curves," European Journal of Operational Research, Elsevier, vol. 246(1), pages 140-153.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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