2
$\begingroup$

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.

$\endgroup$
2
  • $\begingroup$ 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, 2019 at 17:20
  • $\begingroup$ so you assume yields can't go negative? Interesting. $\endgroup$
    – will
    Apr 5, 2019 at 21:26

0

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Browse other questions tagged or ask your own question.