Callable Bond Pricing using the Hull-White Model:A Comprehensive Analysis
Sarvagya Jha
Sarvagya Jha, Department of Finance, Rutgers University, 1 Washington Pl, Newark, New Jersey, United States of America (USA).
Manuscript received on 07 October 2024 | First Revised Manuscript received on 15 October 2024 | Second Revised Manuscript received on 28 March 2025 | Manuscript Accepted on 15 May 2025 | Manuscript published on 30 May 2025 | PP: 27-34 | Volume-5 Issue-1, May 2025 | Retrieval Number: 100.1/ijef.A260105010525 | DOI: 10.54105/ijef.A2601.05010525
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© The Authors. Published by Lattice Science Publication (LSP). This is an open-access article under the CC-BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: This paper presents a comprehensive analysis of callable bond pricing using the Hull-White interest rate model. We compare the performance of the Hull-White model with other short-rate models, namely the Vasicek and CoxIngersoll-Ross (CIR) models, in pricing callable bonds across various market conditions. Through extensive numerical simulations and empirical analysis, we demonstrate that the Hull-White model generally outperforms other models in fitting the initial termstructure and pricing callable bonds, particularly in volatile interest rate environments. We also propose an improved parameter estimation method for the Hull-White model, which enhances its pricing accuracy. Furthermore, we explore the implications of using the HullWhite model for callable bond pricing on issuer and investor behavior. Our findings contribute to the literature on interest rate modeling and provide practical guidelines for financial professionals in the valuation and risk management of callable bonds.
Keywords: Interest Rate Modeling, Callable Bonds, HullWhite Model, Fixed Income Securities, Risk Management.
Scope of the Article: Finance