Generalizations of Ho-Lee's binomial interest rate model II: randomization

Abstract

In the present paper, we introduce a generalization of Ho-Lee's binary tree interest rate model, which can be regarded as a Bayesian type extension, by combining the technique used by Akahori-Aoki-Nagata with a randomization by a Polya urn type reinforcement. Moreover, a multinomial extension of the generalization of the Ho-Lee model is also discussed.