Convex Upper and Lower Bounds for Present Value Functions

Vyncke, David; Goovaerts, Marc; Dhaene, Jan

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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

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: 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