RT Journal Article
SR Electronic
T1 A Heuristic Algorithm for the Heath–Jarrow–Morton Model
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 94
OP 103
DO 10.3905/jfi.2016.26.1.094
VO 26
IS 1
A1 Hung Do
A1 Michael J. Tomas
YR 2016
UL https://pm-research.com/content/26/1/94.abstract
AB Heath–Jarrow–Morton [1990, 1991, and 1992] presented a general, intuitively appealing, term structure model for pricing interest rate claims. However, in discrete time, the model results in a non-recombining tree for many general deterministic volatility structures, which can be relatively computationally expensive when the number of time steps is large. This article provides a technique that combines interpolation with sparse ad-hoc mesh generation for valuing interest rate claims in the Heath–Jarrow–Morton framework. When this approach is used, the number of nodes in the mesh is significantly reduced without sacrificing accuracy. This article shows that with proper choice of nodes, the method will converge.TOPICS: Fixed income and structured finance, quantitative methods