easy · Quantitative Finance

In the Vasicek short-rate model dr_t = κ(θ - r_t) dt + σ dW_t, what happens to the drift when the current rate r_t is higher than the long-run level θ?

1. The drift is negative, pulling the rate down toward θ.
2. The drift becomes stochastic and its sign cannot be determined.
3. The drift is zero, and the rate is driven only by the random dW_t term.
4. The drift is positive, pushing the rate further away from θ.

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