Financial Risk Manager Part 2
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Which of the following statements correctly describes the dynamics and implications of the cascade form of the Gauss+ model?
A
Under the Gauss+ model, the short-term rate mean reverts to a medium-term factor, the medium-term factor mean reverts to a long-term factor, and the long-term factor is modelled with time-dependent drift and time-dependent volatility.
B
Under the Gauss+ model, the evolution of short-term rate reflects the fact that the Fed keeps the short-term policy rate pegged at a target, and this helps generate a "hump-shaped" term structure of volatility that fits the empirical data quite well.
C
Under the Gauss+ model, the evolution of short-term rate and medium-term factor is modelled with a pre-specified correlation parameter, while the long-term factor is assumed to be independent of the medium-term factor.
D
Under the Gauss+ model, the speed of mean reversion from short-term to medium-term is assumed to be equal to that from medium-term to long-term, while the empirical evidence suggests that the speed of mean reversion among factors is different.