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Ho-Lee model
       
 
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Ho-Lee model

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Ho-Lee model
The first model that set out to model movements in the entire term structure of Interest rates, not just the Short rate, in a way that was consistent with the initially observed term structure. However, since the model only has a single random factor, it makes the simplifying assumption that the Volatility structure remains constant along the Yield curve. Heath-Jarrow-Morton later generalised this model, using a more general form of Volatility and introducing continuous trading. In addition, Ho-Lee allows for the possibility of negative Interest rates.The model was developed using a Binomial tree, although closed-form solutions have NOW been found for Discount bonds and Discount Bond options.
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