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8
votes
1answer
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Applicability of PCA to get historical volatilities to calibrate interest rates trees

My question in short is as follows: can I take main principal component of historical covariance matrix and use it as historical volatilities when fitting a binomial tree? Here's more detailed ...
0
votes
0answers
69 views

How to express the Black Derman & Toy Model in a $dr=A\,dt+B\, dW$ form?

The Black Derman & Toy (BDT) model is given by $$d(\ln\,r)=\left(\theta(t)-\frac {d(\ln\sigma(t))}{dt}\ln r\right)\,dt+\sigma(t) \, dW.$$ How can one rewrite the BDT model as $dr=A\,dt+B\, dW$, ...