On the Ross Recovery under the Hull-White Model

Prof. Masaaki Kijima

Tokyo Metropolitan University

About the Speaker

Masaaki Kijima is a Professor of Finance at Graduate School of Social Sciences, Tokyo Metropolitan University (TMU) since 2006. Before joining TMU, he was a Professor of Financial Engineering at Graduate School of Economics, Kyoto University.

He graduated from the Department of Information Sciences, Tokyo Institute of Technology in 1980, and received a Ph.D. in Business Administration from the William E. Simon Graduate School of Business Administration, University of Rochester, in 1986. He returned to Tokyo Institute of Technology to become an Assistant Professor in 1986 and started his research career of applied probability and finance.

He is the author of two books, “Markov Processes for Stochastic Modeling” in 1997 and “Stochastic Processes with Applications to Finance” in 2002, both published by Chapman & Hall, London. He has published more than 100 research papers in international journals specializing in applied probability and mathematical finance. He is currently an Associate Editor of the SIAM Journal on Financial Mathematics.

Abstract

This paper proposes a framework for calculating the Ross recovery under the Hull-White term structure model. We calibrate swaption prices observed in the market to determine the parameters of the Hull-White model and construct a tri-nominal tree under the risk-neutral probability measure. The transition probabilities on the tri-nominal tree under the physical probability measure can then be calculated by the Ross recovery by applying a novel bisection search. Some numerical examples are given to support the usefulness of our method for the risk evaluation purpose. This is a joint work with T. Higuchi and M. Kato.