Explanation:
C is correct. In the CIR model, the basis-point volatility of the short rate is not independent of the short rate as other simpler models assume. The annualized basis-point volatility equals . Short-term rate in the CIR model cannot be negative because of the combined property that (i) basis-point volatility equals zero when short-term rate is zero, and (ii) the drift is positive when the short-term rate is zero.
A is incorrect. In the Ho-Lee model, the drift of the interest rate process is presumed to be time-varying.
B is incorrect. No long-run equilibrium value is defined in the Ho-Lee model.
D is incorrect. The volatility of the short-term rate is assumed to be proportional to the square root of the short-rate in the CIR model.
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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.