Vasicek Model (Interest Rate Drift)

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Vasicek Model (Interest Rate Drift)

Postby swarnendupathak » Sun Oct 20, 2013 6:01 pm

Can u please explain how to convert a non-recombining tree to a recombining tree under Vasicek Model??

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Vasicek Model (Interest Rate Drift)

Postby swarnendupathak » Mon Oct 21, 2013 5:45 am

is it can be arrived only assessing the probability of UP & DOWN movement last nodal point...by averaging the terminal middle node of of non-recombining tree?? or some other approach is also available?? Please state.

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Vasicek Model (Interest Rate Drift)

Postby swarnendupathak » Wed Oct 23, 2013 6:22 pm

Please reply

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

Vasicek Model (Interest Rate Drift)

Postby pradeeppdy » Fri Oct 25, 2013 5:44 am

Hi i can give you two possible ways here,,,
Vasicek model is,
change in interest rate r= speed of reversion of r*(k-r(t))*small change in time t+ stdDev of r* random error term
if you are taking the up and Down movements as speed of reversion of r*(k-r(t))*small change in time t delta t+ stdDev of r* random error term for up movement and speed of reversion of r*(k-r(t))*small change in time t delta t- stdDev of r* random error term for down movement then i think you shall end up with the recombining tree. A simple non recombining tree has up and down movements governed by the standard deviation oly so that it always converges out but introducing a mean reversion component in these movement shall make the tree recombining i think if i am not wrong.
Converting from the non recombining tree to combining is that you can always know the average time for mean reversion if at all and then stop at the half point of these mean reversion period and then replicate the tree in reverse so that we get two end to end non-recombining trees which represents a recombining trees now

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

Vasicek Model (Interest Rate Drift)

Postby pradeeppdy » Sat Apr 05, 2014 9:58 am

It describes the movement of an interest rate as a factor of , time , equilibrium value and market risk .
The Vasicek interest rate model values the instantaneous interest rate using the following equation:

drt = a(b-rt)dt +sdWt

Random market movements affect the moments of interest rates . This model is called the Vasicek interest rate model.


Return to “PRM Exam”



cron

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.