@article {Nawalkha71, author = {Sanjay K. Nawalkha and Natalia A. Beliaeva}, title = {Efficient Trees for CIR and CEV Short Rate Models}, volume = {10}, number = {1}, pages = {71--90}, year = {2007}, doi = {10.3905/jai.2007.688995}, publisher = {Institutional Investor Journals Umbrella}, abstract = {This article presents truncated-tree transforms for generating binomial and trinomial trees under the Cox, Ingersoll, and Ross (CIR) and constant-elasticity-of-variance (CEV) models of the short rate. The authors correct an error in the original square root transform of Nelson and Ramaswamy [1990], and modify their transform by truncating the tree exactly at the zero-boundary. This not only allows for the creation of more efficient trees for the CIR square-root process, but also for the entire class of CEV models of the short rate. The simulations in this article show fast convergence and significantly improved performance of the truncated-tree approach over the Nelson-Ramaswamy approach.TOPICS: Statistical methods, fixed income and structured finance, performance measurement}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/10/1/71}, eprint = {https://jai.pm-research.com/content/10/1/71.full.pdf}, journal = {The Journal of Alternative Investments} }