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

Abstract

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.