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References (10)
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R. Rebonato (1996)
Interest-rate option models -
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Bond and Option Pricing when Short Rates are LognormalFinancial Analysts Journal, 47
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Flesaker Flesaker, Hughston Hughston (1996)
Positive interestRisk, 9
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Heath Heath, Jarrow Jarrow, Morton Morton (1992)
Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuationEconometrica, 60
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Hull Hull, White White (1994)
Numerical procedures for implementing term structure models I: single factor modelsThe Journal of Derivatives, 7
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Numerical Procedures for Implementing Term Structure Models I, 2
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M. Musiela, M. Rutkowski (2002)
Martingale Methods in Financial Modelling -
D. Heath, R. Jarrow, A. Morton (1990)
Bond Pricing and the Term Structure of Interest Rates: A Discrete Time ApproximationJournal of Financial and Quantitative Analysis, 25
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Pricing Interest-Rate-Derivative SecuritiesReview of Financial Studies, 3
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B. Flesaker, L. Hughston (1997)
Dynamic Models of Yield Curve Evolution
- Publisher
- Wiley
- Copyright
- Copyright © 2001 John Wiley & Sons, Ltd.
- ISSN
- 1524-1904
- eISSN
- 1526-4025
- DOI
- 10.1002/asmb.432
- Publisher site
- See Article on Publisher Site
Abstract
The arbitrage free market framework of Heath, Jarrow and Morton provides a mathematical scheme according to which the valuation of all interest rate derivatives depend on two kinds of basic parameters: the discount function and the (generally stochastic) volatilities of zero coupon bonds of all maturities. Among the models in this class, Flesaker‐Hughston's rational lognormal model stands out for naturality and simplicity while incorporating positivity of interest rates: all fundamental processes (short rate, discount and zero‐coupon bonds) are parametrized as rational functions of an exponential martingale. Its practical implementation presents, however, a few subtle aspects. We discuss its numerical implementation with special attention to issues of fitting and calibration, and pricing of exotic options. A comparison with other standard models such as Hull‐White and Black‐Karasinki will be presented in test cases. Copyright © 2001 John Wiley & Sons, Ltd.
Journal
Applied Stochastic Models in Business and Industry – Wiley
Published: Jan 1, 2001