Closed-form Arrow-Debreu pricing for the Hull-White short rate model

C. Turfus

Quantitative Finance, 2019, vol. 19, issue 12, 2087-2094

Abstract: We consider the Hull-White short rate model and provide a systematic derivation of an Arrow-Debreu pricing formula for European-style options in closed form, applying it to cap/floor pricing and CMS (constant maturity swap) index calculation. We present in the process a useful exponential expansion formula which facilitates the analytic solution of pricing equations. We propose that the methodology here described is of interest insofar as it is applicable to a wider range of short rate modelling problems potentially involving lognormal rates/credit volatility, local-stochastic volatility and/or multiple stochastic factors or underlyings.

Date: 2019
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DOI: 10.1080/14697688.2019.1636125

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