Definition of 'Hull-White Model'
The Hull-White model is a one-factor model, which means that it only uses one factor to describe the evolution of the yield curve. The factor in the Hull-White model is the short-term interest rate. The model assumes that the short-term interest rate follows a mean-reverting process. This means that the short-term interest rate will tend to return to its long-term average value.
The Hull-White model is a popular model for pricing interest rate derivatives. It is also used for hedging interest rate risk.
The Hull-White model has been criticized for being too simplistic. It does not take into account the effects of volatility and liquidity on the yield curve. However, the model is still widely used because it is relatively simple to understand and implement.
The Hull-White model is a valuable tool for understanding and pricing interest rate derivatives. It is a relatively simple model to understand and implement, and it can be used to hedge interest rate risk. However, the model is not without its limitations, and it should be used with caution.
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