Lattice Models for Pricing American Interest Rate Claims

JOURNAL OF FINANCE, Vol 50 No 2, June 1995

Posted: 20 Dec 1998

See all articles by Anlong Li

Anlong Li

KL Capital

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

L. Sankarasubramanian

affiliation not provided to SSRN

Abstract

This article establishes efficient lattice algorithms for pricing American interest-sensitive claims in the Heath, Jarrow, Morton paradigm, under the assumption that the volatility structure of forward rates is restricted to a class that permits a Markovian representation of the term structure. The class of volatilities that permits this representation is quite large and imposes no severe restrictions on the structure for the spot rate volatility. The algorithm exploits the Markovian property of the term structure and permits the efficient computation of all types of interest rate claims. Specific examples are provided.

JEL Classification: G13

Suggested Citation

Li, Anlong and Ritchken, Peter H. and Sankarasubramanian, L., Lattice Models for Pricing American Interest Rate Claims. JOURNAL OF FINANCE, Vol 50 No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6194

Anlong Li

KL Capital ( email )

141 Jackson Blvd
Suite 1650
Chcago, IL 60604
United States

Peter H. Ritchken (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

L. Sankarasubramanian

affiliation not provided to SSRN

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