Hull–White Model


DEFINITION of 'Hull–White Model'

A single-factor interest model used to price derivatives. The Hull-White 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 Hull-White model extends the Vasicek and Cox-Ingersoll-Ross (CIR) models.

BREAKING DOWN 'Hull–White Model'

Investments whose values are dependent on interest rates, such as bond options and mortgage-backed 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 Ho-Lee model, the Hull-White 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 Hull-White 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.

  1. Cox-Ingersoll-Ross Model - CIR

    A mathematical formula used to model interest rate movements ...
  2. Vasicek Interest Rate Model

    A method of modeling interest rate movement that describes the ...
  3. Jarrow Turnbull Model

    One of the first reduced-form models for pricing credit risk. ...
  4. Black Scholes Model

    A model of price variation over time of financial instruments ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  6. Heath-Jarrow-Morton Model - HJM ...

    A model that applies forward rates to an existing term structure ...
Related Articles
  1. Options & Futures

    Breaking Down The Binomial Model To Value An Option

    Find out how to carve your way into this valuation model niche.
  2. Options & Futures

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  3. Fundamental Analysis

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  4. 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.
  5. Options & Futures

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  6. Bonds & Fixed Income

    The Impact Of An Inverted Yield Curve

    Find out what happens when short-term interest rates exceed long-term rates.
  7. Investing Basics

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  8. 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.
  9. Bonds & Fixed Income

    Bond Yield Curve Holds Predictive Powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  10. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center