Volume 15 | Issue 2 | Article 2

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An Extension to Fitting Discrete Time Term Structure Models when Rates are Outcomes of Bernoulli Trials
Hari P. Krishnan and Michael J. Tomas III ( )

This paper specifies the proper drift adjustment terms for the single factor Heath Jarrow Morton term structure model, using the standard binomial framework. Unlike previous work, which was based on normal distribution assumptions, this derivation is done purely in discrete time under the assumption that the random variable is the outcome of a Bernoulli trial (a binomial distribution). This paper provides the first rigorous derivation of drift adjustment terms for the single factor Heath Jarrow Morton equation in discrete space and time.