Hull-White Model

The Hull-White Model is an important concept in the context of financial mathematics. The Hull-White Model deals with future rates of interest. John Hull and Alan White explained the original version of Hull-White model in 1990.

The Hull-White model had been formulated by using a trinomial lattice. The Hull-White model is a supplement of the Vasicek model. However, the Hull-White model is different from the Vasicek model. The main difference lies in the nature of the mean reversion.
Description of Hull-White Model
In the Hull-White Model the interest rate for a shorter period of time is of utmost importance. Thus the Hull-White Model can also be alternatively described as No-arbitrage Yield Curve model or Short-rate model or Single-Factor model.
Equational Representation of Hull-White Model
The equational representation of the Hull-White model is dr(t) = (φ(t) – α(t)r(t))dt + σ(t)dW(t)

The details of the equational representation of the Hull-White model could be explained as below:

Sign Meaning or Representation
dr Short term interest rate change over a short period of time
dt Minor movement of time
r Rate of interest over a shorter period of time
s Short rate’s yearly standard variation
q(t) Function of time that determines the average direction of r’s movement. The function is chosen in a way that changes in the short term rate of interest tally with the yield curve of the modern zero coupon bond
dz It is a Wiener process. It is derived from a random standard normal process
a Average rate of reversion. It regulates the relationship of the long rate volatilities and short rate volatilities

Application of Hull-White Model

The Hull-White model is used to determine the value of bonds. The Hull-White model is also applied to find out the worth of derivatives.

More Information Related to Finance Theory
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Public Finance Mortgage Loan Discount
Term Financing Yield Curve Arbitrage
Finance Services Company Arbitrage Pricing Credit Derivative
Binomial Options Pricing Model Capital Asset Pricing Model Cox Ingersoll Ross Model
Black Model Black Scholes Model Chen Model
Liquidity Risk Commodity Risk Consumer Credit Risk
Systemic Risk Currency Risk Market Risk
Interest Rate Risk Settlement Risk Equity Risk
Gordon Model Monte Carlo Option Model Ho Lee Model
Rendleman Bartter Model Vasicek Model Hull White Model
Rational Choice Theory Modern Portfolio Theory Cumulative Prospect Theory
Efficient Market Hypothesis Arrow Debreu Model International Fisher Effect
Floating Currency Financial Risk Management Hyperbolic Discounting
Personal Budget Floating Exchange Rate Discount Rate

Last Updated on : 1st July 2013