Posted by
Chak Jack Wong on
URL: http://quantlib.414.s1.nabble.com/joint-calendar-tp2345p2354.html
Ferdinando Ametrano wrote:
> At 11:54 AM 2/13/2003 +0000, you wrote:
> >I am wondering if anyone is working on the generalized hull-white
> >model? (i.e.
> >with piecewise constant vol and piecewise constant mean reversion?)
> No-one I know of
>
> >This allows exact calibration of the diagonal of swaptions and possibly a cap.
> You're right, but while piecewise constant vol/reversion allows for a good
> fit it is considered to be a questionable over-parametrization that will
> produce unreliable implied curve dynamic.
> See Rebonato for more details.
>
Depending on how and why you want to use the normal model, what Rebonato says may
or may not apply.
I used to be in exotic interest products, and under that case, we were really
interested in the residual risk of
the product (the exotic risk) we have to carry, the implied curve dynamic doesn't
really matter. (Of course, for
the exotic pricing, libor market model would be more useful, but one factor
Hull-White is far quicker. )
I think the ability to calibrate at least to the diagonal ( or the diagonal of
swaptions at the strike of the bermudan product )
is essential for exotic pricing.
>
> I've used the generalized hull-white model in the past, with only 2 levels
> of mean reversion: one for the "short" horizon (< 3/5 years), the other for
> the long term rate.
> I don't think it would make sense to have more knots for mean reversion
>
It will be useful to have the mean reversion to have different knots points if you
want to calibrate the individual caplet vols in addition to the diagonal of
swaptions for bermudan type products. The implied curve dynamic is probably not
important in this case, as we are interested in pricing of the residual exotic
risk. (Again LMM would be better in this sense. But a very carefully calibrated
Hull-White can do the trick. e.g. calibrate the skew to the exercise boundary,
etc.)
>
> This said I would appreciate to have a generalized hull-white model
> contributed to QuantLib, at least to study the implied dynamic, even if I
> would be using it with constant parameters
>
> ------------
> ciao -- Nando
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