RT Journal Article
SR Electronic
T1 Efficient Trees for CIR and CEV Short Rate Models
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 71
OP 90
DO 10.3905/jai.2007.688995
VO 10
IS 1
A1 Sanjay K. Nawalkha
A1 Natalia A. Beliaeva
YR 2007
UL https://pm-research.com/content/10/1/71.abstract
AB This article presents truncated-tree transforms for generating binomial and trinomial trees under the Cox, Ingersoll, and Ross (CIR) and constant-elasticity-of-variance (CEV) models of the short rate. The authors correct an error in the original square root transform of Nelson and Ramaswamy [1990], and modify their transform by truncating the tree exactly at the zero-boundary. This not only allows for the creation of more efficient trees for the CIR square-root process, but also for the entire class of CEV models of the short rate. The simulations in this article show fast convergence and significantly improved performance of the truncated-tree approach over the Nelson-Ramaswamy approach.TOPICS: Statistical methods, fixed income and structured finance, performance measurement