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The Journal of Fixed Income

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Primary Article

A Closed-Form Multifactor Binomial Interest Rate Model

Thomas S.Y. Ho and Sang Bin Lee
The Journal of Fixed Income Summer 2004, 14 (1) 8-16; DOI: https://doi.org/10.3905/jfi.2004.419532
Thomas S.Y. Ho
President of Thomas Ho Company in New York City.
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  • For correspondence: tom.ho@thomasho.com
Sang Bin Lee
A professor of finance at Hanyang University in Seoul, Korea.
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  • For correspondence: leesb@hanyang.ac.kr
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Abstract

A number of binomial interest rate models have found broad application in valuing interest rate-contingent claims. While researchers are seeking to extend the one-factor model to multifactor models, so far all multifactor models are non-recombining interest rate models, which are not as accurate in valuing securities calibrated to market prices. The multifactor closed-form binomial interest rate model proposed here is simple to implement and can capture a broad range of interest rate movements that are arbitrage-free. Empirical evidence supports the robustness of the model, which can be calibrated to 70 at-the-money swaptions with under 1.3% average error.

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The Journal of Fixed Income
Vol. 14, Issue 1
Summer 2004
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A Closed-Form Multifactor Binomial Interest Rate Model
Thomas S.Y. Ho, Sang Bin Lee
The Journal of Fixed Income Jun 2004, 14 (1) 8-16; DOI: 10.3905/jfi.2004.419532

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A Closed-Form Multifactor Binomial Interest Rate Model
Thomas S.Y. Ho, Sang Bin Lee
The Journal of Fixed Income Jun 2004, 14 (1) 8-16; DOI: 10.3905/jfi.2004.419532
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