PT - JOURNAL ARTICLE AU - Hung Do AU - Michael J. Tomas TI - A Heuristic Algorithm for the Heath–Jarrow–Morton Model AID - 10.3905/jfi.2016.26.1.094 DP - 2016 Jun 30 TA - The Journal of Fixed Income PG - 94--103 VI - 26 IP - 1 4099 - https://pm-research.com/content/26/1/94.short 4100 - https://pm-research.com/content/26/1/94.full AB - Heath–Jarrow–Morton [1990, 1991, and 1992] presented a general, intuitively appealing, term structure model for pricing interest rate claims. However, in discrete time, the model results in a non-recombining tree for many general deterministic volatility structures, which can be relatively computationally expensive when the number of time steps is large. This article provides a technique that combines interpolation with sparse ad-hoc mesh generation for valuing interest rate claims in the Heath–Jarrow–Morton framework. When this approach is used, the number of nodes in the mesh is significantly reduced without sacrificing accuracy. This article shows that with proper choice of nodes, the method will converge.TOPICS: Fixed income and structured finance, quantitative methods