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

Jiro Akahori (), Hiroki Aoki () and Yoshihiko Nagata ()

Asia-Pacific Financial Markets, 2006, vol. 13, issue 2, pages 151-179

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 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

Keywords: Ho–Lee model; Duration; Multi-factor; Recombining tree; Stationary increments; Forward rate; Drift condition; 91B28; 60G50; G12 (search for similar items in EconPapers)

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