Improving Discrete Implementation of the Hull and White Two-Factor Model

Faculty/Professorship: Banking and Financial Control  
Author(s): Muck, Matthias ; Rudolf, Markus
Title of the Journal: The Journal of Fixed Income : JFI
Corporate Body: Inst. Investor, Inc.
Publisher Information: New York, NY
Year of publication: 2005
Volume: 14
Issue: 4
Pages: 67-75 ; Diagramme
Year of first publication: 2005
Language(s): English
DOI: 10.3905/jfi.2005.491116
This research analyzes the convergence properties of a discrete implementation of the Hull and White two-factor model. It compares caplet prices using both the discrete valuation algorithm and the analytic solution. Quality of the results depends crucially on the properties of the model parameters. The valuation algorithm may be improved while preserving its computational efficiency. An application of the modified algorithm to the caplet pricing problem indicates that substantially reduced valuation errors.
Peer Reviewed: Ja
International Distribution: Ja
Type: Article
Year of publication: 15. November 2012