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Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation

Published online by Cambridge University Press:  06 April 2009

David Heath ,
Robert Jarrow  and
Andrew Morton
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Abstract

This paper studies the binomial approximation to the continuous trading term structure model of Heath, Jarrow, and Morton (1987). The discrete time approximation makes the original methodology accessible to a wider audience, and provides a computational procedure necessary for calculating the contingent claim values derived in the continuous time paper. This paper also extends and generalizes Ho and Lee's (1986) model to include multiple random shocks to the forward rate process and to include an analysis of continuous time limits. The generalization provides insights into the limitations of the existing empirical implementation of Ho and Lee's model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 25 , Issue 4 , December 1990 , pp. 419 - 440
Copyright
Copyright © School of Business Administration, University of Washington 1990

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