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A New Recombination Tree Algorithm for Mean-Reverting Interest-Rate Dynamics

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DOI: 10.4236/ajcm.2013.34038    3,862 Downloads   5,736 Views  
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ABSTRACT

In light of the fact that no existing tree algorithms can guarantee the recombination property for general Ornstein-Uhlenbeck processes with time-dependent parameters, a new trinomial recombination-tree algorithm is designed in this research. The proposed algorithm enhances the existing mechanisms in interest-rate modelings with the comparisons to [1,2] methodologies, and the proposed framework provides a more efficient way in discrete-time mean-reverting simulations.

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P. Lin, "A New Recombination Tree Algorithm for Mean-Reverting Interest-Rate Dynamics," American Journal of Computational Mathematics, Vol. 3 No. 4, 2013, pp. 291-296. doi: 10.4236/ajcm.2013.34038.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] J. Hull and A. White, “Pricing Interest-Rate-Derivative Securities,” Review of Financial Studies, Vol. 3, No. 4, 1990, pp. 573-592. http://dx.doi.org/10.1093/rfs/3.4.573
[2] F. Black, E. Derman and W. Toy, “A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options,” Financial Analysts Journal, Vol. 46, No. 1, 1990, pp. 33-39. http://dx.doi.org/10.2469/faj.v46.n1.33
[3] T. H. Cormen, C. E. Leiserson, R. L. Rivest and C. Stein, “Introduction to Algorithms,” 3rd Edition, The MIT Press, Cambridge, 2009.
[4] J. Hull, “Options, Futures, and Other Derivatives,” 7th Edition, Prentice Hall, Upper Saddle River, 2008.
[5] D. Brigo and F. Mercurio, “Interest Rate Models-Theory and Practice,” 2nd Edition, Springer, New York, 2006.

  
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