Lattice models for pricing American interest rate claims
Article Abstract:
This article establishes efficient lattice algorithms for pricing American interest-sensitive claims in the Heath, Jarrow, and Morton paradigm, under the assumption that the volatility structure of forward rates is restricted to a class that permits a Markovian representation of the term structure. The class of volatilities that permits this representation is quite large and imposes no severe restrictions on the structure for the spot rate volatility. The algorithm exploits the Markovian property of the term structure and permits the efficient computation of all types of interest rate claims. Specific claims are provided. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1995
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Pricing options under generalized GARCH and stochastic volatility processes
Article Abstract:
It has been possible to establish an efficient lattice algorithm for pricing European and US options under discrete time General Autoregressive Conditionally Heteroskedastic (GARCH) processes. This algorithm has also been extended to price options under generalized GARCH processes. A vector of option prices is carried along at each asset price in the tree, but computations are still efficient. The algorithm allows alternative volatility evolution processes to be compared using the rich option data sets that have now been developed.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1999
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