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axe
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Posts: 37
Joined: January 23rd, 2010, 1:53 am

Hull-White short rate model- theta term

November 24th, 2010, 4:45 pm

Hi, in the above equation, I am not sure I quite well understand the intuition behind the theta term. I know is the time dependent value where the short rate is expected to revert. But would it be right to say that is is chosen so as the be equal to the instantaneous forward rates that can be calculated from the current yield curve.Thanks in advance.
 
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tagoma
Posts: 18849
Joined: February 21st, 2010, 12:58 pm

Hull-White short rate model- theta term

December 6th, 2010, 4:44 pm

you should read your theta(t) term this way : at time (t), the short rate reverts to theta(t)/alpha at rate alpha.