Convex Upper and Lower Bounds for Present Value Functions

Applied Stochastic Models in Business and Industry, Vol. 17, pp. 149-164, 2001

17 Pages Posted: 1 Mar 2006

See all articles by David Vyncke

David Vyncke

Ghent University - Department of Applied Mathematics and Computer Science

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics

Jan Dhaene

Katholieke Universiteit Leuven

Abstract

In this paper we present an efficient methodology for approximating the distribution function of the net present value of a series of cash-flows, when the discounting is presented by a stochastic differential equation as in the Vasicek model and in the Ho-Lee model. Upper and lower bounds in convexity order are obtained. The high accuracy of the method is illustrated for cash-flows for which no analytical results are available.

Suggested Citation

Vyncke, David and Goovaerts, Marc and Dhaene, Jan, Convex Upper and Lower Bounds for Present Value Functions. Applied Stochastic Models in Business and Industry, Vol. 17, pp. 149-164, 2001 , Available at SSRN: https://ssrn.com/abstract=884471

David Vyncke (Contact Author)

Ghent University - Department of Applied Mathematics and Computer Science ( email )

Gent, 9000
Belgium

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics ( email )

Leuven, B-3000
Belgium
+32 0 16 32 7446 (Phone)
+32 0 16 32 3740 (Fax)

Jan Dhaene

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

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