Discrete-time continuous-state interest rate models ☆

@inproceedings{Sullivan1999DiscretetimeCI,
  title={Discrete-time continuous-state interest rate models ☆},
  author={Michael A. Sullivan},
  year={1999}
}
We show how to implement arbitrage-free models of the short-term interest rate in a discretetime setting that allows a continuum of rates at any particular date. Discrete time allows approximate pricing of interest rate contingent claims that cannot be valued in continuous-time models. It is usually associated with discrete states, with possible interest rates restricted to a limited number of outcomes, as in the lattice model of Hull and White (1994). We develop a method for approximating the… CONTINUE READING

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