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

Jirô Akahori·Hiroki Aoki·Yoshihiko Nagata
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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 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.

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Jirô Akahori, Hiroki Aoki, Yoshihiko Nagata. 2006-06-08. Generalizations of Ho-Lee's binomial interest rate model I: from one- to multi-factor. https://arxiv.org/abs/math/0606183

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