Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation

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Heath, David, Robert Jarrow, and Andrew Morton, "Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation", Journal of Financial and Quantitative Analysis, Vol. 25, No. 4, (December 1990), pp. 419-440.

Abstract: This paper studies the binomial approximation to the continuous term structure model of Heath, Jarrow, and Morton (1987). The discrete time approximation makes the original methodology accessible to a wider audience, and provides a computational procedure necessary for calculating the contingent claim values derived in the continuous time paper. This paper also extends and generalizes Ho and Lee's (1986) model to include multiple random shocks to the forward rate process and to include an analysis of continuous time limits. The generalization provides insights into he limitations of the existing empirical implementation of Ho and Lee's model.

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