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John Hull QUOTES / QUOTATIONS
Alan White and I have not as yet written anything on VAR but we have done a number of consulting projects in this area and expect to do more.
Quotation of John Hull
Alan White and I spent the next two or three years working together on this. We developed what is known a stochastic volatility model. This is a model where the volatility as well as the underlying asset price moves around in an unpredictable way.
Quotation of John Hull
Briefly speaking, our conclusion is that stochastic volatility does not make a huge difference as far as the pricing is concerned if you get the average volatility right. It makes a big difference as far as hedging is concerned.
Quotation of John Hull
HJM propose a two-factor model. In a one-factor model all rates move in the same direction over any short period of time.
Quotation of John Hull
I didn't become interested in derivatives until 1982, 1983.
Quotation of John Hull
I guess any simple idea that is really good will catch on quickly.
Quotation of John Hull
I think VAR is a very healthy development within the industry.
Quotation of John Hull
If each of your time steps is one week long, you are not modeling the stock price terribly well over a one-week time period, because you are saying that there are only two possible outcomes.
Quotation of John Hull
In the interest rate area, traders have for a long time used a version of what is known as Black's model for European bond options; another version of the same model for caps and floors; and yet another version of the same model for European swap options.
Quotation of John Hull
One important measurement issue concerns the fat tails problem that I mentioned earlier. VAR is concerned with extreme outcomes. If the tails of the probability distributions we are using are too thin, our VAR measures are likely to be too low.
Quotation of John Hull
Our research led on to other things, such as the fact that exchange rates are not lognormally distributed.
Quotation of John Hull
Our starting point then was trying to find a way to incorporate mean reversion into the HoLee model.
Quotation of John Hull
Our tree is actually a tree of the short-term interest rate. The average direction in which the short-term interest rate moves depends on the level of the rate. When the rate is very high, that direction is downward; when the rate is very low, it is upward.
Quotation of John Hull
The BlackScholes model is a robust model that has stood the test of time. Our stochastic volatility research revealed more of a hedging problem than a pricing problem.
Quotation of John Hull
The HoLee model was the first term structure model. I remember reading their paper soon after it was published and as it was fairly different from many of the other papers that I had read, I had to read it quite a few times. I realized that it was a really important paper.
Quotation of John Hull
The problem with interest rates are that you are not modeling a single number, you are modeling a whole term structure, so it is a sort of different type of problem.
Quotation of John Hull
The real challenge was to model all the interest rates simultaneously, so you could value something that depended not only on the three-month interest rate, but on other interest rates as well.
Quotation of John Hull
There are challenges in terms of the measurement of VAR for what are known as nonlinear derivatives, where things like gamma and vega are important dimensions of the risk.
Quotation of John Hull
There were small bits of tweaking going on such as our stochastic volatility research, but basically the BlackScholes model is a pretty robust model.
Quotation of John Hull
This binomial tree was very well established; everybody used it from the late 1970s onward. The reason it does not work very well for interest rates is because of mean reversion.
Quotation of John Hull
Virtually all our ideas have come from talking to practitioners about the sort of problems that they are having.
Quotation of John Hull
We concluded that you cannot rely on delta hedging alone. It sounds simplistic to say that now, but back then, this was the sort of thing people were only just beginning to realize.
Quotation of John Hull
We got interested in interest rate research back in 1987, when there was a sense that as far as stock options, foreign currency options, futures options and index options were concerned, the BlackScholes model covered it.
Quotation of John Hull
We started giving presentations at practitioner conferences in 1986, and since then all of our derivatives research has been stimulated by contact with practitioners.
Quotation of John Hull
When interest rates are high you want the average direction in which interest rates are moving to be downward; when interest rates are low you want the average direction to be upward.
Quotation of John Hull
Yes, our tree has an interesting shape. The center branches reflect the shape of the zero curve. When extreme parts of the tree are reached the branching pattern changes to accommodate the mean reversion.
Quotation of John Hull