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Application of the Kusuoka approximation with a tree-based branching algorithm to the pricing of interest-rate derivatives under the HJM model

Part of: Probabilistic methods, simulation and stochastic differential equations

Published online by Cambridge University Press:  01 July 2010

Mariko Ninomiya
Mariko Ninomiya*
Affiliation:
3-1, Hongo 7-chome, Bunkyo-ku, Tokyo, 113-0033, Japan (email: [email protected])

Abstract

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This paper demonstrates the application of a new higher-order weak approximation, called the Kusuoka approximation, with discrete random variables to non-commutative multi-factor models. Our experiments show that using the Heath–Jarrow–Morton model to price interest-rate derivatives can be practically feasible if the Kusuoka approximation is used along with the tree-based branching algorithm.

MSC classification

Secondary: 65C30: Stochastic differential and integral equations 65C05: Monte Carlo methods
Type
Research Article
Information
LMS Journal of Computation and Mathematics , Volume 13 , January 2010 , pp. 208 - 221
Copyright
Copyright © London Mathematical Society 2010

References

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