What is hull-white model?

The Hull-White model is a one-factor Gaussian model used to describe the evolution of interest rates over time. It was developed by John Hull and Alan White in 1990 as a modification of the Vasicek model.

The model assumes that short-term interest rates are governed by a stochastic process that is described by a single mean reversion parameter and a volatility parameter. The mean reversion parameter represents the speed at which the short-term interest rate returns to its long-term average, while the volatility parameter represents the randomness or unpredictability of the changes in the short-term interest rate.

The Hull-White model has several applications in the financial industry, including the pricing of interest rate derivatives and the simulation of interest rate scenarios for risk management purposes. One of the advantages of the Hull-White model is that it can be easily calibrated to market data, making it a useful tool for practitioners.