Explanation:
In the Cox-Ingersoll-Ross (CIR) model, the stochastic differential equation is . Therefore, the basis-point volatility of the short-term rate is proportional to the square root of the rate (). Option A is incorrect because the Ho-Lee model incorporates a time-dependent drift to fit the initial term structure. Option B is incorrect because the Ho-Lee model does not incorporate mean reversion. Option D is incorrect because the CIR model does not assume volatility declines exponentially; rather, it depends on the square root of the current short rate.
Ultimate access to all questions.
A
In the Ho-Lee model, the drift of the interest rate process is presumed to be constant.
B
In the Ho-Lee model, when the short-term rate is above its long-run equilibrium value, the drift is presumed to be negative.
C
In the Cox-Ingersoll-Ross model, the basis-point volatility of the short-term rate is presumed to be proportional to the square root of the rate.
D
In the Cox-Ingersoll-Ross model, the volatility of the short-term rate is presumed to decline exponentially to a constant long-run level.
No comments yet.