medium · FRM Part 2 Market Risk
In term structure modeling, which characteristic distinguishes the Cox-Ingersoll-Ross (CIR) model from the Vasicek model?
- The Vasicek model incorporates mean reversion in short rates while the CIR model does not include it.
- Vasicek assumes a log-normal short-rate process while CIR instead assumes a normally distributed one.
- Volatility in CIR is proportional to the square root of the interest rate, preventing negative rates.
- CIR is classified as an arbitrage-free model while Vasicek is instead classified as an equilibrium model.
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