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

Senay Agca () and Don Chance

Applied Mathematical Finance, 2004, vol. 11, issue 3, 187-205

Abstract: 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.

Keywords: term structure; Ho-Lee model; Heath-Jarrow-Morton model (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1080/1350486042000228717

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