A Multi-factor Markovian Hjm Model For Pricing American Interest Rate Derivatives

摘要

This article presents a numerically efficient approach for constructing an interest rate lattice for multi-state variable multi-factor term structure models in the Makovian HJM [Econometrica 70 (1992) 77] framework based on Monte Carlo simulation and an advanced extension to the Markov Chain Approximation technique. The proposed method is a mix of Monte Carlo and lattice-based methods and combines the best from both of them. It provides significant computational advantages and flexibility with respect to many existing multi-factor model implementations for interest rates derivatives valuation and hedging in the HJM framework.