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Explanation:
Mean reverting parameter:
4`% \approx 2% + \frac{0.1%}{k}
\Rightarrow k = 0.05
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Q.2661 Given the following data:
Current short-term interest rate: 1.5%
Long-run mean reverting level: 4%
Long-run true interest rate: 2%
Interest rate drift: 0.1%
Use the Vasicek model with mean reversion to determine the model’s mean-reverting parameter.
A
0.04
B
0.015
C
0.022
D
0.05