Two-Factor Hull-White Model Revisited: Correlation Structure for Two-Factor Interest Rate Model in CVA Calculation
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arXiv
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| Format: | Preprint |
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2026
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| _version_ | 1866915877975228416 |
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| author | Tsuchiya, Osamu |
| author_facet | Tsuchiya, Osamu |
| contents | The development of credit valuation adjustment (CVA) (valuation adjustments [XVA]) [Green] has increased the importance of simple interest rate models such as the Hull-White model [Tan14] [Tsuchiya]. This is because the XVA model is an FX hybrid model, and is tractable only when the interest rate part is a simple Gaussian model. For the XVA calculation of interest rate instruments, de-correlation of the yield curve can be important even for the swap portfolio. Capturing the correlation structure in the two-factor Hull-White model is an integral element of CVA (XVA) modeling. However, the correlation structure in two-factor Hull-White model has not studied enough except for the analysis in [AndersenPiterbarg]. In this study, the correlation structure of the two-factor Hull-White model is analyzed in detail. The correlation structure of co-initial swap rates is investigated using a combination of the approximation formula and Monte-Carlo simulation. The Hull-White model captures the de-correlation of the yield curve only when the parameters (volatilities and mean reversion strength) satisfy certain relationships, making the valuation of XVA by two-factor Hull-White model effective. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2603_20243 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Two-Factor Hull-White Model Revisited: Correlation Structure for Two-Factor Interest Rate Model in CVA Calculation Tsuchiya, Osamu Pricing of Securities Mathematical Finance Applications The development of credit valuation adjustment (CVA) (valuation adjustments [XVA]) [Green] has increased the importance of simple interest rate models such as the Hull-White model [Tan14] [Tsuchiya]. This is because the XVA model is an FX hybrid model, and is tractable only when the interest rate part is a simple Gaussian model. For the XVA calculation of interest rate instruments, de-correlation of the yield curve can be important even for the swap portfolio. Capturing the correlation structure in the two-factor Hull-White model is an integral element of CVA (XVA) modeling. However, the correlation structure in two-factor Hull-White model has not studied enough except for the analysis in [AndersenPiterbarg]. In this study, the correlation structure of the two-factor Hull-White model is analyzed in detail. The correlation structure of co-initial swap rates is investigated using a combination of the approximation formula and Monte-Carlo simulation. The Hull-White model captures the de-correlation of the yield curve only when the parameters (volatilities and mean reversion strength) satisfy certain relationships, making the valuation of XVA by two-factor Hull-White model effective. |
| title | Two-Factor Hull-White Model Revisited: Correlation Structure for Two-Factor Interest Rate Model in CVA Calculation |
| topic | Pricing of Securities Mathematical Finance Applications |
| url | https://arxiv.org/abs/2603.20243 |