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Hello all,
I am working on my school project and try to implement 2 factor Hull White model.
I am on the stage where I need to apply correlation:
Joint probabilities:
Pdu=Pd*Qu-epsilon,
where Pd-probability down of 1 tree
Qu-probability of up of 2 tree.
Epsilon=correlation/36
In other words with, with some values of correlation, joint probability becomes negative.
The paper suggests to find the minimum correlation that will be positive and use it.
http://www-2.rotman.utoronto.ca/~hu...for implementing Term Structure Models II.pdf
Any suggestions how can I find the smallest correlation that will make the joint probability positive.
Thank you!
I am working on my school project and try to implement 2 factor Hull White model.
I am on the stage where I need to apply correlation:
Joint probabilities:
Pdu=Pd*Qu-epsilon,
where Pd-probability down of 1 tree
Qu-probability of up of 2 tree.
Epsilon=correlation/36
In other words with, with some values of correlation, joint probability becomes negative.
The paper suggests to find the minimum correlation that will be positive and use it.
http://www-2.rotman.utoronto.ca/~hu...for implementing Term Structure Models II.pdf
Any suggestions how can I find the smallest correlation that will make the joint probability positive.
Thank you!
