Abstract

http://ssrn.com/abstract=359040
 
 

References (7)



 


 



Recombining Trees for One-Dimensional Forward Rate Models


Dariusz Gatarek


Deloitte & Touche CE

Jaroslaw Kolakowski


SAS Institute Inc. - Poland



Abstract:     
There exist two classes of interest rate models. Short rate models (HW, CIR, BDT), easy in pricing and tough in calibration and forward rate models (HJM, BGM), easy in calibration and tough in pricing. Parameters in short rate models have no natural interpretation in terms of market volatility but many options can be priced on recombining trees. We find particularly inconvenient the procedure of fitting the initial yield curve - necessary for many short rate models. Parameters of forward rate models (especially BGM) have direct link to market volatility but there exists a common prejudice that recombining trees cannot be applied to forward rate models. This paper is an attempt to construct a model allowing both recombining trees and "calibration without programming". We would like to call both presented models "simplest possible term structure models" - at least we do not know any simpler model.

Number of Pages in PDF File: 9

Keywords: BGM model, HJM model, calibration, Bermudan swaptions, Brady bonds

working papers series


Download This Paper

Date posted: March 7, 2003  

Suggested Citation

Gatarek, Dariusz and Kolakowski, Jaroslaw, Recombining Trees for One-Dimensional Forward Rate Models. Available at SSRN: http://ssrn.com/abstract=359040 or http://dx.doi.org/10.2139/ssrn.359040

Contact Information

Dariusz Gatarek (Contact Author)
Deloitte & Touche CE ( email )
Fredry 6
Warsaw, 00-097
Poland
Jaroslaw Kolakowski
SAS Institute Inc. - Poland ( email )
01-633 Warsaw, Gdanska 27/31
Poland
Feedback to SSRN


Paper statistics
Abstract Views: 1,866
Downloads: 554
Download Rank: 26,156
References:  7

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.235 seconds