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I can't find that anywhere online and It doesn't seems to me that this model originated come from intuition or some human motivation but rather it is coming from computerized curve fitting as all the textbook leave out the details...

The question is, did anybody here find one or two explanation at all?

Thank You in advance for enlighten me.

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  • $\begingroup$ Vasicek model was developed a long time ago (1977). It was the first interest rate model. Only assumption was that interest rates are mean reverting, and this is the mathematically simplest model having that property. It is not considered very advanced by present day standards, just a first step. $\endgroup$ – noob2 May 18 at 22:08
  • $\begingroup$ @noob2 - Although Vasicek models did not had a detail oriented/rigorous explanation on how it work, do other more complicated interest rate/finance models had math derivation just as some math/stat model(gamma distribution, exponential distribution, normal distribution) had both intuitve explanation and rigorous derivation? Thank You Very Much for your kind attention and detailed oriented comment on top. $\endgroup$ – Victor May 18 at 22:23
  • $\begingroup$ The model itself is known as Ornstein Uhlenbeck process in physics. Did you read Vasicek paper? $\endgroup$ – Aksakal May 19 at 4:10
  • $\begingroup$ @Aksakal The paper seems to be esoteric and long but my question is why do analyst assuming that this model fit to estimate interest rate but not other models that may share some similar properties, for example the models with the mean reverting propertie? $\endgroup$ – Victor May 19 at 5:35
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    $\begingroup$ @AlanLui, you'll never get an answer to a question like that in finance. This is not a fundamental science like physics. If anything, there can be a ton of reasons why this model should not be the right model. It's simple and economists like to use it in studies where the exact evolution of rates is not so important. It captures mean reverting characteristic. $\endgroup$ – Aksakal May 19 at 5:40

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