A fractal version of the Hull–White interest rate model

Donatien Hainaut

Economic Modelling, 2013, vol. 31, issue C, 323-334

Abstract: This paper develops a new version of the Hull–White's model of interest rates, in which the volatility of the short term rate is driven by a Markov switching multifractal model. The interest rate dynamics is still mean reverting but the constant volatility of the Brownian motion is replaced by a multifractal process so as to capture persistent volatility shocks. In this setting, we infer properties of the short term rate distribution, a semi-closed form expression for bond prices and their dynamics under a forward measure. Finally, our work is illustrated by a numerical application in which we assess the exposure of a bonds portfolio to the interest risk.

Keywords: Hidden Markov process; Switching Brownian motion; Interest rates; Hull–White model; Switching volatility; Markov modulated volatility (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:31:y:2013:i:c:p:323-334

DOI: 10.1016/j.econmod.2012.11.041

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