I have implemented the Black-Karasinski model using trinomial trees and calibrated following Brigo (2007) page 29. However, the results do not fit the interest rate curve practiced in the market. As I could verify, there are something around 30 to 60bps of difference in the 10Y tenor.

Is this due to the fact that I have not used the "market price of risk" to correct my drift in the calibration? In the way I am implementing, both drift and volatility are constant for the whole simulation.

Edit1: moreover, if I analyse the outcome of these "non-adjusted by the mpr" simulations, is my analysis useless?


  • 1
    $\begingroup$ Pls add more details to your question so that it can still be understood and answered even if the link you have provided is broken or changed. $\endgroup$
    – Alper
    Jun 20 at 15:24
  • $\begingroup$ Hi what are you trying to achieve ? No model can be expected to exactly fit the market. The market can be anywhere due to supply and demand. $\endgroup$
    – dm63
    Jun 21 at 10:42
  • $\begingroup$ The idea is to achieve a curve that fits the curve observed from the market. My question is that if I don't use the market price of risk to adjust my drift, considering that BK is a non-arbitrage model, is my analysis useless or is there any huge flaw in it? $\endgroup$ Jun 21 at 13:22


Browse other questions tagged or ask your own question.