A fresh view on the Ho–Lee model of the term structure from a stochastic discounting perspective

The paper gives a slightly generalised version of the well-known Ho–Lee model of the term structure of interest rates. The Ho–Lee model is reconstructed by the method of stochastic discounting; continuous time limits are considered which are parallel to the work of Heath, Jarrow and Morton. In contrast to the existing literature the model makes explicit use of the empirical rather than the risk–neutralized probabilities. Consequently, the market's risk aversion plays a specific role in the resulting interest rate process.