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

DOI10.1007/S10690-007-9039-8MaRDI QIDQ2643675zbMATH OpenOpenAlexFDO

Authors Jirô Akahori, Hiroki Aoki, Yoshihiko Nagata

Publication date 27 August 2007

Published in Asia-Pacific Financial Markets (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0606183

Mathematics Subject Classification ID

Sums of independent random variables; random walks (60G50) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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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Cited in

(9)

• A fresh view on the Ho-Lee model of the term structure from a stochastic discounting perspective
• A squared binomial tree approach to discrete-time bond market modelling
• A noisy principal component analysis for forward rate curves
• A result in the Ho and Lee's model
• On the Mean-Variance Hedging in the Ho--Lee Diffusion Model
• Two extensions for fitting discrete time term structure models with normally distributed factors
• Generalizations of Ho-Lee's binomial interest rate model II: randomization
• Extensions of the Ho and Lee interest-rate model to the multinomial case
• Continuous-time approximation of short-term interest rates in generalized Ho-Lee framework

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