I am trying to construct a Black-Derman-Toy trinomial tree as explained in Espen Haug's Complete Guide to Option Pricing Formulas, chapter 11. Where do I get the Inputs (table 11-2) from if I wanted to experiment with the latest data?

The table has 3 columns. Years to Maturity, Zero Coupon Rates, Zero Coupon Volatilities. Years to Maturity are from 1Y to 5Y. Rates are 9%, 9.5%,10%,10.5%,11% The vols are 24%,22%,20%,18%,16%. (The data looks to be made up, I am looking for realistic and current data).

I might be able to get zc yields from Quandl website but I am not sure where to get yield volatilities from. Do these need to be calculated? If yes, can I take a year's worth of prices and compute sigma using Eq 12.1 (chapter 12) from the same book? Or do I need to substitute Cap vols? Thanks in advance.

  • $\begingroup$ Not an answer as I am not sure if this is correct. I can download one year ZC yields from fred.stlouisfed.org/series/THREEFY1 and compute daily returns as LN(y_t/y_t-1) for the past 5 years, compute the mean and take sqrt((return_t - mean)/n-1) and then annualize it by multiplying sqrt(252). Do the same for other maturities. $\endgroup$
    – suhasghorp
    Apr 5 '19 at 17:20
  • $\begingroup$ so you assume yields can't go negative? Interesting. $\endgroup$
    – will
    Apr 5 '19 at 21:26

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