hi, everybody:Recently, in order to compute the OAS of China MBS, I want to use the Hull-White model to simulate interest process. But there are only bonds and MBS data at China market. So, is there a reasonable method to obtain the drift and volatility parameters in the Hull-White model ? Your help will be highly appreciated.Sincerely, Bu

Hi,you can use bonds to construct a discount curve which is what you need then you can calibrate your model to the current interest rate structure. There are also the mean reversion and vol parameter to choose. Commonly, caplet or swaption vols are used to calibrate those but maybe you can choose them inline with quoted MBS prices.Cheers Lapsi

thanks a lot,I am an Beginner, i think your meaning is that i can construct a h-w Trinomial Trees to fit the treasury bond market price to determine the drift and volatility parameters, so the market price of MBS is not useful. Is my understanding right?Bu

Depending on your purpose you can even use the initial yield curve as the input to the H-W model (to determine the instantaneous forward rate at future time t). However, as far as know, there are two government bond markets (exchange-based and inter-bank) in China so you need to sort out which market to use first Could you specify your problem (which MBS products you are pricing)?

Hi, Edwyn:At China, the exchange-based bond market has more liquidity than inter-bank bond market does, but the inter-bank bond market has much more volume than exchange-based bond market does. So, there is not unique data choice to construct the initial yield. I am planning to use the inter-bank bond market data to calculate the OAS of China MBS "Jianyuan". The "Jianyuan" is an adjustable MBS issued by China Construction Bank and is traded at inter-bank bond market only. I really want to know the detail steps of calculation and how to obtain the parameter of H-W model.Thanks a lot. Bu