Interest rate trees : extensions and applications

John Hull and Alan White (Joseph L. Rotman School of Management, University of Toronto)

This paper provides extensions to existing procedures for representing one-factor no-arbitrage models of the short rate in the form of a tree. It allows a wide range of drift functions for the short rate to be used in conjunction with a wide range of volatility assumptions. It shows that, if the market price of risk is a function only of the short rate and time, a single tree with two sets of probabilities on branches can be used to represent rate moves in both the real-world and risk-neutral world. Examples are given to illustrate how the extensions can provide modeling flexibility when interest rates are negative

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Year of publication:	March 5, 2017
Authors:	Hull, John ; White, Alan
Publisher:	[Toronto] : [University of Toronto - Rotman School of Management]
Subject:	Term Structure \| No-Arbitrage Model \| Tree \| Alternative Drift Functions \| Real World \| Risk-Neutral World \| Negative Interest Rates \| Zinsstruktur \| Yield curve \| Zins \| Interest rate \| Optionspreistheorie \| Option pricing theory \| CAPM

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