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Vasicek Interest Rate Model

What is 'Vasicek Interest Rate Model'

A method of modeling interest rate movement that describes the movement of an interest rate as a factor of market risk, time and equilibrium value that the rate tends to revert towards. This stochastic model is often used in the valuation of interest rate futures.

The Vasicek interest rate model values the instantaneous interest rate using the following equation:

drt = a(b-rt)dt +sdWt

Where Wt is the random market risk (represented by the Wiener process)
t represents time
a(b-rt) represents the expected change in the interest rate at t (drift factor)
a is the speed of reversion
b is the long-term level of the mean
s is the volatility at the time

Explaining 'Vasicek Interest Rate Model'

The Vasicek interest rate model states that the movement of interest rates is affected only by random market movements. In the absence of market shocks (i.e., when dWt = 0) the interest rate remains constant (rt = b). When rt < b, the drift factor becomes positive, indicating that the interest rate will increase towards equilibrium.


Further Reading


Sticky reflecting Ornstein-Uhlenbeck diffusions and the Vasicek interest rate model with the sticky zero lower bound
www.tandfonline.com [PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …

On the resolution of the Vasicek-type interest rate modelOn the resolution of the Vasicek-type interest rate model
www.tandfonline.com [PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …

Machine learning Vasicek model calibration with Gaussian processesMachine learning Vasicek model calibration with Gaussian processes
www.tandfonline.com [PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …

Modeling the Term-Structure of Interest Rates in the SSE with Multiple-Factor Vasicek Model <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-XTGL200405016.htm' />Modeling the Term-Structure of Interest Rates in the SSE with Multiple-Factor Vasicek Model [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-XTGL200405016.htm'>PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …

Analysis of pricing European call foreign currency option under the Vasicek interest rate modelAnalysis of pricing European call foreign currency option under the Vasicek interest rate model
en.cnki.com.cn [PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …

Pricing American interest rate options under the jump-extended Vasicek modelPricing American interest rate options under the jump-extended Vasicek model
jod.pm-research.com [PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …

Optimal management under stochastic interest rates: the case of a protected defined contribution pension fundOptimal management under stochastic interest rates: the case of a protected defined contribution pension fund
www.sciencedirect.com [PDF]
… Therefore, without loss of generality, we suppose that the recovery rates and the … j.1540-6261.1995.tb05167.x; JD Duffie and KJ Singleton, “Modeling Term Structures … Li, “Pricing Formulae for European Option under the Fractional Vasicek Interest Rate Model,” Acta …



Q&A About Vasicek Interest Rate Model


What are these factors based on?

These factors are based on market risk (represented by Wiener process), time and equilibrium value.

What do these three factors represent?

These three factors represent instantaneous interest rates, expected change in the interest rates at t (drift factor) and long-term level of mean respectively.

What is the short rate model?

The short rate model is a mathematical model that describes the future evolution of interest rates.

What does the short rate model describe?

The short rate model describes how interest rates change over time.

What is the Vasicek interest rate model?

The Vasicek interest rate model is a method of modeling interest rates that describes the movement of an interest rate as a factor of market risk, time and equilibrium value that the rate tends to revert towards.

How are interest rates described in this article?

Interest rates are described as instantaneous.

Where do you find information about stochastic models?

You can find information about stochastic models in books on mathematics, statistics and finance.

What is an instantaneous interest rate?

An instantaneous interest rate is a state variable that changes over time.

What is meant by instantaneous interest rates?

Instantaneous Interest Rates refers to changes in short term bonds or loans for which there is no specific maturity date.

How does this stochastic model describe the movement of an interest rate?

This stochastic model describes the movement of an interest rate using three factors; market risk, time and equilibrium value.