What is Hull-White Model?
The Hull-White model is a one-factor mean-reverting interest rate model used to generate realistic interest rate scenarios for Monte Carlo simulation. It assumes that short-term interest rates follow a process that tends to revert toward a long-run mean level, with random shocks. The model has two key parameters: mean reversion speed (how quickly rates return to the mean) and volatility (the magnitude of random rate shocks). Hull-White is widely used in fixed income analytics because it can be calibrated to the current yield curve and produces arbitrage-free rate paths.
Formula
dr = [theta(t) - a*r] dt + sigma*dW Where a = mean reversion speed, sigma = volatility, theta(t) = time-dependent drift, dW = Brownian motion
How LoanBook Uses Hull-White Model
LoanBook's OAS engine uses Hull-White with mean reversion speed of 0.10 (10%) and volatility of 0.01 (100bp) as default parameters. The model generates interest rate paths that are calibrated to the current Treasury curve. Parameters can be overridden in the model configuration system.
Frequently Asked Questions
Why use Hull-White instead of other rate models?
Hull-White is preferred for whole loan analytics because it can be calibrated exactly to the current yield curve (arbitrage-free), has intuitive parameters (mean reversion and volatility), and is computationally efficient for Monte Carlo simulation.
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