The Hull-White model under volatility uncertainty

Hölzermann J (2021)
Quantitative Finance.

Zeitschriftenaufsatz | E-Veröff. vor dem Druck | Englisch
 
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Abstract / Bemerkung
We study the Hull-White model for the term structure of interest rates in the presence of volatility uncertainty. The uncertainty about the volatility is represented by a set of beliefs, which naturally leads to a sublinear expectation and a G-Brownian motion. The main question in this setting is how to find an arbitrage-free term structure. This question is crucial, since we can show that the classical approach, martingale modeling, does not work in the presence of volatility uncertainty. Therefore, we need to adjust the model in order to find an arbitrage-free term structure. The resulting term structure is affine with respect to the short rate and the adjustment factor. Although the adjustment changes the structure of the model, it is still consistent with the traditional Hull-White model after fitting the yield curve. In addition, we extend the model and the results to a multifactor version, driven by multiple risk factors.
Stichworte
Robust finance; Model uncertainty; Interest rates; No-arbitrage
Erscheinungsjahr
2021
Zeitschriftentitel
Quantitative Finance
ISSN
1469-7688
eISSN
1469-7696
Page URI
https://pub.uni-bielefeld.de/record/2956020

Zitieren

Hölzermann J. The Hull-White model under volatility uncertainty. Quantitative Finance. 2021.
Hölzermann, J. (2021). The Hull-White model under volatility uncertainty. Quantitative Finance. https://doi.org/10.1080/14697688.2021.1923788
Hölzermann, J. (2021). The Hull-White model under volatility uncertainty. Quantitative Finance.
Hölzermann, J., 2021. The Hull-White model under volatility uncertainty. Quantitative Finance.
J. Hölzermann, “The Hull-White model under volatility uncertainty”, Quantitative Finance, 2021.
Hölzermann, J.: The Hull-White model under volatility uncertainty. Quantitative Finance. (2021).
Hölzermann, Julian. “The Hull-White model under volatility uncertainty”. Quantitative Finance (2021).

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