The General Hull-White Model and Super Calibration
20 Pages Posted: 4 Nov 2008
Date Written: August 2000
Abstract
Term structure models are widely used to price interest-rate derivatives such as swaps and bonds with embedded options. This paper describes how a general one-factor model of the short-rate can be implemented as a recombining trinomial tree and calibrated to market prices of actively traded instruments such as caps and swap options. The general model encompasses most popular one-factor Markov models as special cases. The implementation and the calibration procedures are sufficiently general that they can select the functional form of the model that best fits the market prices. This allows the model to fit the prices of in- and out-ofthe-money options when there is a volatility skew. It also allows the model to work well very low interest-rate economies such as Japan where other models often fail.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions
By Joost Driessen, Pieter Klaassen, ...
-
On the Information in the Interest Rate Term Structure and Option Prices
By Frank De Jong, Joost Driessen, ...
-
Pricing and Hedging Interest Rate Options: Evidence from Cap-Floor Markets
-
On Pricing and Hedging in the Swaption Market: How Many Factors, Really?
By Rong Fan, Anurag Gupta, ...
-
Libor and Swap Market Models for the Pricing of Interest Rate Derivatives: An Empirical Analysis
By Frank De Jong, Joost Driessen, ...
-
Observational Equivalence of Discrete String Models and Market Models
By Jeroen Kerkhof and Antoon Pelsser