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Answer: Gauss+ Model is a three-factor model (with two sources of risk), Gauss+ Model can capture the hump-shaped term structures of volatility
Based on the comparison table: **Key Differences:** - **Vasicek Model**: One-factor model with normal distribution assumption, cannot capture hump-shaped volatility term structures, simple but less flexible - **Gauss+ Model**: Three-factor model (with two sources of risk), assumes normal distributions for factors, can capture hump-shaped term structures of volatility, balances tractability The correct answers are E and F because: - **E**: Gauss+ Model being a three-factor model is a key distinguishing feature from the one-factor Vasicek model - **F**: The ability to capture hump-shaped term structures of volatility is a significant advantage of the Gauss+ model over the Vasicek model This comparison highlights how the Gauss+ model provides more flexibility in modeling interest rate dynamics, particularly in capturing more complex volatility patterns observed in real markets.
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1.14.1.2. Gauss+ Model vs. Vasicek Model:
| Vasicek Model | Gauss+ Model |
|---|---|
| A one-factor model. | A three-factor model (with two sources of risk). |
| Assumes a normal distribution for the factor. | Assumes normal distributions for the factors. |
| Cannot capture the hump-shaped term structures of volatility. | Can capture the hump-shaped term structures of volatility. |
| A simple but less flexible model. | A model that balances the tractability |
A
Vasicek Model is a one-factor model
B
Vasicek Model assumes a normal distribution for the factor
C
Vasicek Model cannot capture the hump-shaped term structures of volatility
D
Vasicek Model is a simple but less flexible model
E
Gauss+ Model is a three-factor model (with two sources of risk)
F
Gauss+ Model can capture the hump-shaped term structures of volatility