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 while CIR does not.
- Vasicek uses a log-normal process while CIR is normal.
- Volatility in CIR is proportional to the square root of the interest rate, preventing negative rates.
- CIR is an arbitrage-free model while Vasicek is an equilibrium model.
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