Hull Whit Calibration

[RKG]

I'm trying to understand how the mean-reversion and sigma of Hull White model are calibrated using the current yield curve and swaption volatility. I am at undergrad level but this is used in my internship. I would appreciate if someone could provide or point me to step by step guide to the calibration process, but still be a little easier to comprehend. Sorry if this sounds stupid, but I am having a tough time understanding it.

 

[Keith Tan]

i thought your mean and sigma are derived from historical data? then you could do a backtest?

 

[diegosanaz]

I guess you are using zero curves? If so, this might be helpful. The gist of the optimization is that a H-W model should induce how the current term structure should look like. Then the optimization is to find the parameters that would make an induced term structure that is closest looking to the current observed one (keep in mind that this optimization gives parameters under Q measure).

I think this links could be useful to you:
http://www.math.kth.se/matstat/seminarier/reports/M-exjobb12/120220b.pdf
http://quant.stackexchange.com/questions/8724/how-to-calibrate-hull-white-from-zero-curve

Best of luck