NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Efficient Generalized Discrete-Time Approach to Poisson-Gaussian Bond Option Pricing in the Heath-Jarrow-Morton Model

Sanjiv Ranjan Das

NBER Technical Working Paper No. 212
Issued in June 1997
NBER Program(s):   AP

Term structure models employing Poisson-Gaussian processes may be used to accommodate the observed skewness and kurtosis of interest rates. This paper extends the discrete-time, pure-Gaussian version of the Heath-Jarrow-Morton model to the pricing" of American-type bond options when the underlying term structure of interest rates follows a Poisson-Gaussian process. The Poisson-Gaussian process is specified using a hexanomial tree (six nodes emanating from each node), and the tree is shown to be recombining. The scheme is parsimonious and convergent. This model extends the class of HJM models by (i) introducing a more generalized volatility specification than has been used so far, and (ii) inducting jumps, yet retaining lattice recombination, thus making the model useful for practical applications.

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Document Object Identifier (DOI): 10.3386/t0212

Published: Das, Sanjiv Ranjan. "A Direct Discrete-Time Approach To Poisson-Gaussian Bond Option Pricing In The Heath-Jarow-Morton Model," Journal of Economic Dynamics and Control, 1998, v23(3,Nov), 333-369.

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