A New Recombination Tree Algorithm for Mean-Reverting Interest-Rate Dynamics

摘要

In light of the fact that no existing tree algorithms can guarantee the recombination property for general Ornstein-Uhlenbeck processes with time-dependent parameters, a new trinomial recombination-tree algorithm is designed in this research. The proposed algorithm enhances the existing mechanisms in interest-rate modelings with the comparisons to [1,2] methodologies, and the proposed framework provides a more efficient way in discrete-time mean-reverting simulations.