What made the BDT model so popular amongst traders?

pusher · October 12th, 2004, 2:13 pm

The BDT model looks deceptively simple but what is it that, in the 90's, made the BDT model so popular amongst traders? What model do traders like to look at most, nowdays?

exotiq · October 12th, 2004, 2:48 pm

Like the CRR model for equity options, its deceptive simplicity. Many traders don't think in SDE's, they think in up and down moves.I see different traders look at different things for different purposes (hedging, prop trading, etc.). Libor Market Models and Hull-White are amongst the most common I've seen on desks.

pusher · October 12th, 2004, 5:12 pm

yes, but is there something special to it that the other models like Vasicek, Ho-lee, CIR, etc. miss out on?On quite a few occasions, I have come across the "wild popularity of the BDT model in the late 80's to early 90's amongst traders" when compared to the other existing models. So I was wondering..thanks

akimon · October 12th, 2004, 8:00 pm

Part of the polularity is due to the clear writing style of Fisher and Derman when publishing their BDT paper.You can read the history behind the BDT model in Derman's recent autobio. It's actually a good read!

HKQuant · October 13th, 2004, 5:03 am

I think it's popularity comes from its ability to have an exact fit to caplet vols. In other models (other than BGM), the vol function do you really have any physical significance, so traders find it hard to relate movements in market cap/swaption vols to movements in Hull and White vol for example (because some calibration procedures are usually required).