I'm using MATLAB's function "hwcalbycap" to fit the Hull-White model to the EURIBOR curve. I'm getting data from Bloomberg on the cap volatility surface. There are two options: Normal and Black (VCUB EUR, 96[market data], 12[Caps/Floors]).
I'm clearly a novice in this area, so I'm not sure which vol surface to use? Any views on this is greatly appreciated
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Re: Hull-White in MATLAB - which vol surface to use
I'm not familiar with the MATLAB function you're using, but it seems to me that if the model you are using is normal (i.e. the short rate r(t) is distributed normally), as it is in the Hull-White model, then you would want the normal vols. Black vols are lognormal.
HTH
HTH
Re: Hull-White in MATLAB - which vol surface to use
You need the volatility which is used by the model that calculates the benchmark prices for your calibration.
Your MATLAB function supports three models: Black, Shifted Black and Normal. I would recommend Normal, since Black is inappropriate due to negative interest rates.
Your MATLAB function supports three models: Black, Shifted Black and Normal. I would recommend Normal, since Black is inappropriate due to negative interest rates.