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Two extensions for fitting discrete time term structure models with normally distributed factors

Author

Listed:
  • Senay Ağca
  • Don Chance

Abstract

This paper provides extensions to procedures for the implementation of two well-known term structure models. In the first part, a misleading implication given in two textbooks concerning the ability to fit a Ho-Lee type term structure tree through trial and error is corrected, and it is shown that the tree can be fitted precisely with a simple and easily programmable formula. In the second part, a previously published result that obtains the drift for a single-factor discrete time Heath-Jarrow-Morton model is extended to a multi-factor world. In both cases numerical examples are provided.

Suggested Citation

  • Senay Ağca & Don Chance, 2004. "Two extensions for fitting discrete time term structure models with normally distributed factors," Applied Mathematical Finance, Taylor & Francis Journals, vol. 11(3), pages 187-205.
    • Handle: RePEc:taf:apmtfi:v:11:y:2004:i:3:p:187-205
    DOI: 10.1080/1350486042000228717
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