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

Research paper by Jirô Akahori, Hiroki Aoki, Yoshihiko Nagata

Indexed on: 08 Jun '06Published on: 08 Jun '06Published in: Mathematics - Probability


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.