Extensions of the Ho and Lee interest-rate model to the multinomial case

Extensions of the Ho and Lee interest-rate model to the multinomial case

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Article ID: iaor2006182
Country: Netherlands
Volume: 163
Issue: 1
Start Page Number: 154
End Page Number: 169
Publication Date: May 2005
Journal: European Journal of Operational Research
Authors: , ,
Keywords: markov processes
Abstract:

The paper presents a state dependent multinomial model of intertemporal changes in the term structure of interest rates. The model is a one-factor interest-rate model within the Markov family models for short-term interest rate and it extends the Ho and Lee binomial model. We derive the theoretical basis of the multinomial model, suggest a computational framework to evaluate the model's parameters and investigate the suitability of the model for the Italian market.

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