Volatility in the 2-Factor Black Karasinski Model
Document ID: 2006-335 (previously 2006/008)
Published on: 31st May 2006
Author: Colin Holmes
The standard deviation (volatility) of interest rates generated by the 2-factor Black Karasinski model changes from one calibration to the next, even if (as in Best-Estimate calibrations) the volatility and mean reversion parameters do not change between calibrations. This feature often concerns clients, but is in fact a simple consequence of the 2-factor Black Karasinski model.
