An Efficient Generalized Discrete-Time Approach to Poisson-Gaussian Bond Option Pricing in the Heath-Jarrow-Morton Model / Sanjiv Ranjan Das.

Format:

Book

Author/Creator:

Das, Sanjiv Ranjan.

Contributor:

National Bureau of Economic Research.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0212.

NBER technical working paper series no. t0212

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

Term structure models employing Poisson-Gaussian processes may be used to accommodate the observed skewness and kurtosis of interest rates. This paper extends the discrete-time, pure-Gaussian version of the Heath-Jarrow-Morton model to the pricing" of American-type bond options when the underlying term structure of interest rates follows a Poisson-Gaussian process. The Poisson-Gaussian process is specified using a hexanomial tree (six nodes emanating from each node), and the tree is shown to be recombining. The scheme is parsimonious and convergent. This model extends the class of HJM models by (i) introducing a more generalized volatility specification than has been used so far, and (ii) inducting jumps, yet retaining lattice recombination, thus making the model useful for practical applications.

Notes:

Print version record

June 1997.