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A multi-factor Markovian HJM model for pricing American interest rate derivatives |
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| Authors: | Marat V Kramin Saikat Nandi Alexander L Shulman | ||
| Institution: | (1) Quantitative Analysis, Fixed Income, Wachovia Bank, 300 W 5 Street, Apt. #636, Charlotte, NC 28202, USA;(2) Fixed Income Research, Fannie Mae, Washington, DC, USA;(3) Technology & Modeling, Fannie Mae, Washington, DC, USA | ||
| Abstract: | This article presents a numerically efficient approach for constructing an interest rate lattice for multi-state variable
multi-factor term structure models in the Makovian HJM Econometrica 70 (1992) 77] framework based on Monte Carlo simulation and an advanced extension to the Markov Chain Approximation technique. The
proposed method is a mix of Monte Carlo and lattice-based methods and combines the best from both of them. It provides significant
computational advantages and flexibility with respect to many existing multi-factor model implementations for interest rates
derivatives valuation and hedging in the HJM framework.
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| Keywords: | Monte Carlo simulation Lattice Recombining tree American derivatives Markovian HJM framework Multi-state variable multi-factor model Interest rate options Computational efficiency | ||
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