easy · Quantitative Finance stochastic
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?
- The drift is negative, pulling the rate down toward θ.
- The drift becomes stochastic and its sign cannot be determined.
- The drift is zero, and the rate is driven only by the random dW_t term.
- The drift is positive, pushing the rate further away from θ.
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