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Review of Derivatives Research

, Volume 7, Issue 3, pp 213–239 | Cite as

Efficient Calibration of Trinomial Trees for One-Factor Short Rate Models

  • Markus LeippoldEmail author
  • Zvi Wiener
Article

Abstract

In this paper we propose a computationally efficient implementation of general one factor short rate models with a trinomial tree. We improve the Hull–White’s procedure to calibrate the tree to bond prices by circumventing the forward rate induction and numerical root search algorithms. Our calibration procedure is based on forward measure changes and is as general as the Hull–White procedure, but it offers a more efficient and flexible method of constructing a trinomial term structure model. It can be easily implemented and calibrated to both prices and volatilities.

Keywords

short rate models trinomial trees forward measure. 

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Copyright information

© Kluwer Academic Publishers 2005

Authors and Affiliations

  1. 1.Swiss Banking InstituteUniversity of ZurichSwitzerland
  2. 2.School of Business AdministrationThe Hebrew University of JerusalemLos AngelesIsraelUSA

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