easy · FRM Part 2 Market Risk
A bank uses the Vasicek model dr = k(θ - r)dt + σ dW to model interest rates.
Which property correctly describes the long-term behavior of the interest rate r in this model?
- The rate will grow indefinitely at a rate θ plus a random shock.
- The rate will revert toward the long-run level θ at a speed determined by k.
- The rate volatility will decrease to zero as the rate approaches θ.
- The rate is guaranteed to stay positive because it reverts to a positive θ.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Market Risk practice
- A leptokurtic distribution, often modeled by EVT, is characterized by which of the followi
- If a bank records 11 exceptions in a 250-day backtesting window for 99% VaR, what is the r
- In the GPD framework, if the threshold u is chosen too low, what is the most likely error
- In the Kupiec Likelihood Ratio test, what does the null hypothesis (H_0) state?
- The Hill estimator is primarily used to provide a direct estimate of which parameter?
- What happens to the mean of a GPD-distributed variable if the tail index ξ ≥ 1?
- What happens to the VaR estimate if we move from a thin-tailed (Gumbel, ξ = 0) model to a
- What is the base capital multiplier (m) applied to a bank's internal model market risk cap