DEFINITION of 'Hull–White Model'
A singlefactor interest model used to price derivatives. The HullWhite model assumes that short rates have a normal distribution, and that the short rates are subject to mean reversion. Volatility is likely to be low when short rates are near zero, which is reflected in a larger mean reversion in the model. The HullWhite model extends the Vasicek and CoxIngersollRoss (CIR) models.
BREAKING DOWN 'Hull–White Model'
Investments whose values are dependent on interest rates, such as bond options and mortgagebacked securities, have grown in popularity as financial systems have become more sophisticated. Determining the value of these investments often entailed using different models, with each model having its own set of assumptions. This made it difficult to match the volatility parameters of one model with another model, and also made it difficult to understand risk across a portfolio of different investments.
Like the HoLee model, the HullWhite model treats interest rates as normally distributed. This creates a scenario in which interest rates are negative, though there is a low probability of this occurring as a model output. The HullWhite model also prices the derivative as a function of the entire yield curve, rather than at a single point. Because the yield curve estimates future interest rates rather than observable market rates, analysts will hedge against different scenarios that economic conditions might create.

CoxIngersollRoss Model  CIR
A mathematical formula used to model interest rate movements ... 
Vasicek Interest Rate Model
A method of modeling interest rate movement that describes the ... 
Jarrow Turnbull Model
One of the first reducedform models for pricing credit risk. ... 
Yield Curve
A line that plots the interest rates, at a set point in time, ... 
Black Scholes Model
A model of price variation over time of financial instruments ... 
HeathJarrowMorton Model  HJM ...
A model that applies forward rates to an existing term structure ...

Options & Futures
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Options & Futures
Managing Interest Rate Risk
Learn which tools you need to manage the risk that comes with changing rates. 
Fundamental Analysis
Derivatives 101
Learn how to use this type of investment as an alternative way to participate in the market. 
Investing Basics
The Barnyard Basics Of Derivatives
This tale of a fictional chicken farm is a great way to learn how derivatives work in the market. 
Options & Futures
Options Pricing
Options are valued in a variety of different ways. Learn about how options are priced with this tutorial. 
Bonds & Fixed Income
The Impact Of An Inverted Yield Curve
Find out what happens when shortterm interest rates exceed longterm rates. 
Investing Basics
What Investors Should Know About Interest Rates
Understanding interest rates helps you answer the fundamental question of where to put your money. 
Investing Basics
Interest Rates And Your Bond Investments
By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it. 
Bonds & Fixed Income
Bond Yield Curve Holds Predictive Powers
This measure can shed light on future economic activity, inflation levels and interest rates. 
Investing Basics
What Does In Specie Mean?
In specie describes the distribution of an asset in its physical form instead of cash.

What is a derivative?
A derivative is a contract between two or more parties whose value is based on an agreedupon underlying financial asset, ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
How can I use a regression to see the correlation between prices and interest rates?
In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >> 
How does implied volatility impact the pricing of options?
Implied volatility is an important aspect of the time value premium of an option. As implied volatility increases, call and ... Read Full Answer >> 
What is the relationship between implied volatility and the volatility skew?
The volatility skew refers to the shape of implied volatilities for options graphed across the range of strike prices for ... Read Full Answer >> 
How is implied volatility for options impacted by a bearish market?
Implied volatility for options increases during a bearish market. A bearish market is considered to have more risk than a ... Read Full Answer >>