Efficient Calibration of Trinomial Trees for One-Factor Short Rate Models

Efficient Calibration of Trinomial Trees for One-Factor Short Rate Models

In this paper we propose a computationally efficient implementation of general one factor short rate models with a trinomial tree. We improve the Hull–White’s procedure to calibrate the tree to bond prices by circumventing the forward rate induction and numerical root search algorithms. Our calibration procedure is based on forward measure changes and is as general as the Hull–White procedure, ...

On Trinomial Trees for One-Factor Short Rate Models∗

In this article we discuss the implementation of general one-factor short rate models with a trinomial tree. Taking the Hull-White model as a starting point, our contribution is threefold. First, we show how trees can be spanned using a set of general branching processes. Secondly, we improve Hull-White’s procedure to calibrate the tree to bond prices by a much more efficient approach. This app...

Spectral properties of trinomial trees

In this paper, we prove that the probability kernel of a random walk on a trinomial tree converges to the density of a Brownian motion with drift at the rate O(h), where h is the distance between the nodes of the tree. We also show that this convergence estimate is optimal in which the density of the random walk cannot converge at a faster rate. The proof is based on an application of spectral ...

Calibration of Interest Rate Models

Cross sectional efficient estimation of stochastic volatility short rate models

We consider the problem of estimation of term structure of interest rates. Filtering theory approach is very natural here with the underlying setup being non-linear and non-Gaussian. Earlier works make use of Extended Kalman Filter (EKF). However, as indicated by de Jong (2000), the EKF in this situation leads to inconsistent estimation of parameters, though without high bias. One way to avoid ...