Questions tagged [vasicek]
The Vasicek model is a 1-factor short-rate model.
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Interest rate hedging under Vasicek model
Let's consider the case of a bank that receive of 1,000,000$ from a customer and decides to invest that amount between a long term Treasury bond and an overnight deposit (alternatively, it could ...
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Extension of time homogeneous short rate model in Brigo Mercurio
Question
I am going through section 3.8 "A General Deterministic Drift Extension" in Brigo Mercurio, and in particular section 3.8.4 "The Vasicek Case". I want to derive the ...
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Interpretation of the TTC and PIT probability of default in the Vasicek model
The well known 2-factor Gaussian model assumes that the default behaviour of a client is ruled by a latent variable defined as:
\begin{align}
y=\sqrt{\rho}Z+\sqrt{1-\rho}\xi
\end{align}
where $Z$ and $...
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Modeling compounded RFRs with Vasicek
I’m wondering if simple interest rates models, like Vasicek, could be successfully used for modeling compounded setting-in-arrears rates (compounded SOFR for example)?
As far as I see I can do that ...
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Deriving solution to bond pricing equation
Consider the Vasicek model for the spot model:
$$
𝑑𝑟 = (𝛼 − 𝛾𝑟)𝑑𝑡 + √𝛽𝑑𝑊
$$
Suppose $𝛾 = 0.1, 𝛾 = 0.1$, and the volatility of the process is 0.02. The spot rate is
10%.
Assume the form of ...
user72282
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ARCH-Vasicek model solution
I understand how we can obtain the solution of Vasicek model $dr_t=\alpha(\mu-r_t)dt+\sigma dW_t$:
$$
r_t=r_0e^{-\alpha t}+\mu(1-e^{-\alpha t})+\sigma\int_0^te^{-\alpha(t-s)dW_{s}}
$$
This easily ...
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Interest rate models history
I am familiar with some interest rate models, such as the Vasicek, CIR. I also have an understanding of the basic formalization of other models such as Ho-Lee, Hull-White, HJM, Libor market model (LMM)...
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Vasicek model calibration to bond prices or rates (no swaptions)
I need to calibrate Vasicek's model $dr_{t} = a(\theta - r_{t})dt + \sigma dW_{t}$ in a market with no swaptions. I was thinking in estimating $\sigma$ with historic data, but I'm in the doubt with ...
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Are instantaneous short rates compatible across models?
If I calibrate the Vasicek's yield curve to the Nelson-Siegel's (NS) yield curve, can I assume that $r_V(0) = r_{NS}(0) = \beta_0 + \beta_1$ or not?
NS short rate:
$r_{NS}(S) = β_0 + β_1 e^{-S/\tau} + ...
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Simulating Hull-White Model in Python
I first simulated the short rate in the Vasicek model using the following code, which is equivalent to simulating the following normal distribution $r_{t} \sim N\left(r_{0}e^{-at} + b\left(1-e^{-at}\...
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Half-life of short rate
The SDE for the short rate r(t) in the Vasicek model is given by:
$$ d(r) = k(r^* - r)dt + \sigma dW $$
The deterministic part of the above SDE is the following ODE
$$ d(r) = k(r^* - r)dt, $$
where $k$...
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Understanding the application of Asset-Correlation to credit risk models
Suppose we have a portfolio of $n$ credits. In order the estimate the Portfolio Value at Risk (99,9) we use a standard vasicek model with the Ability to pay variable $A_i=\sqrt{\rho}x+\sqrt{1-\rho}z_i$...
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ATM cap prices in Vasicek model (Filipovic)
I am trying to replicate the ATM cap prices in table 7.1 (see bottom of this post) from Filipovic's book "Term Structure Models - A Graduate Course" which assume the Vasicek model and uses ...
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How to calibrate an O-U process based on historical data?
Background: I have been working on my master thesis project for the last few months and gave the final presentation on the 2023-06-01. As a part of the master thesis project, I did a complete ...
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Bond-pricing under the Vasicek short rate model
I'm currently studying the Vasicek model of the short interest rate
$$dr_t=a(\mu-r_t)dt+\sigma dW_t$$
I know how to solve this stochastic differential equation (SDE) and how to find expectation and ...
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Expected value and variance of the short rate under the Vasicek model
Would be grateful for any assistance.
Below are the expected value and variance of the integral of the short rate under the Vasicek model (https://www.researchgate.net/publication/41448002):
$E\left[ \...
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Are my fitted Vasicek model parameters market consistent or realistic?
In view of this question I asked some time ago, I tried to calibrate a Vasicek model to some cap volatilities, given as follows. I consider the maturities (in years)
$$
0.5,1,2,3,4,5,7,10,15,20
$$
and ...
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How does one calibrate a Vasicek model to actual cap prices?
I am trying to calibrate a Vasicek model given by
$$
dr(t) = k[\theta - r(t)] dt + \sigma dW(t), \quad r(0) = r_0
$$
where $k, \theta, \sigma, r_0 > 0$. I am using the book by Brigo and ...
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Problem with pricing a call option using the Monte Carlo Vasicek model
I am trying to price a call option on a zero coupon under the Vasicek Model using Monte Carlo method:
$$C_0 = B(0,\theta) \ \mathbb{E}^{\mathbb{Q}_T}[(B(\theta,T)-K)^{+}]$$
The problem is that the ...
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Vasicek Model: smile dynamics
I have come across the statement that the Vasicek model cannot be used to price skew / smile sensitive products: i.e. it cannot be calibrated to replicate a skew or smile. Why is that?
My guess is ...
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Is there a closed form solution to the following system of SDEs?
Suppose we have the system
\begin{align}
dr_t=\alpha_r(x_t-r_t)dt+\sigma_rdW_t^r\\
dx_t=\alpha_x(\bar{x}-x_t)dt+\sigma_xdW_t^x\\
\end{align}
As this system is affine, I believe there should be an easy ...
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Is the G2++ model apt to use when one needs estimates of longer term refinance rates for mortgages and can the model be created with Monte Carlo?
I am currently in the process of developing an interest rate model that would be used to price mortgage-backed securities and develop an OAS estimate. Referring to Brigo and Mercurio (2006) I'm ...
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Square root specification of parameters in factor models
The following formulation is from Vasicek and refers to the cond. probability of the loss of a loan (equ. 3 in the reference):
$$p(Y)=\Phi\left(\frac{\Phi^{-1}(p)-\sqrt{\rho}\,Y}{\sqrt{1-\rho}}\right)....
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Differential vs. derivative in the Vasicek model [closed]
Can anyone help me in understanding how we get the line I have marked with a red arrow?
I guess I have trouble in understanding the difference between differentials and derivatives, i.e. what is the ...
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Obtaining the dynamics of the Vasicek model using Itô
Consider the following expression for the short-term interest rate
$$r_t=r_0 e^{\beta t}+\frac{b}{\beta}\left(e^{\beta t}-1\right)+\sigma e^{\beta t}\int_0^te^{-\beta s}dW_s \tag{1},$$
which is ...
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Zero coupon price using Vasiceks model under the Real-world P measure model
I'm wondering if there is a way to work out the formula for the price of the zero-coupon bond using the Vasicek's model (P measure). I have tried to find reference on it but could not, I don't know if ...
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Including Exogeneous variables in short rate models
I am trying to use short rate models (e.g. Vasicek, CIR or Hull-White) to forecast next one or two months yield curve. In this context, is there a way that I can include some exogenous economic or ...
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Vasicek process with no reversion
I want to prove that as the speed of reversion $\lambda$ in the Vasicek process $dR=\lambda(R_{\infty}−R)dt + \sigma d\beta$ approaches 0, the expected long rate
$$r(0,T)=R_{\infty}+\frac{(R(0)-R_{\...
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How do I estimate the factor sensitivity in a Vasicek Single Factor Model?
I understand the formula of an asset return for an obligor i is given by the following:
$$A_i = \sqrt{w_i}*Z + \sqrt{1-w_i}*\epsilon_i
$$
My question is - How do I calculate $w_i$? I have the PD, LGD ...
user36180
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Why Vasicek model on a tree is a bad choice for pricing American option on credit prepayment?
I have an American option on a credit prepayment, i.e. the holder of the option can prepay the remaining credit if the interest rate falls below the initial strike. The pricing of this option was done ...
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How to obtain the discount curve under Vasicek interest rate for discounting cash flow?
Suppose that the spot rate is governed by a Vasicek model. We know that there is an analytical solution for the zero-coupon bond.
I guess the discount curve is constructed by the Yield curve in which ...
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Distribution and Analytical solution of a GBM with stochastic interest rate?
We model the exchange rate $S_t$ with a geometric Brownian motion and the USD and EUR interest rates $r_u$ and $r_e$ each according to the Vasicek model. Under the domestic equivalent martingale ...
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Trouble Calibrating a Vasicek Model
I have simulated some data according to a Vasicek process and I am then trying to apply ordinary least squares (OLS) regression analysis to see how accurate the estimated model parameters are from the ...
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How to determine the risk premium from the Vasicek one factor model?
The short rate under the Vasicek one factor model under the real-world measure $\mathbb{P} $ follows :
$$ dr(t)=(a\theta - (a+\lambda \sigma)r(t))dt + \sigma dW(t),$$
$$ r(0)=r_0 $$
where $ \lambda $ ...
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Why does adding a negative risk premium to the short rate avoid the occurrence of inverse yield curves?
I am reading about the Vasicek One Factor short rate model and how to implement a change in measure from a risk-neutral to real-world measure, when I came across this comment:
Adding a negative risk ...
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Changing order of integration on stochastic term in Vasicek [closed]
This question is in relation to the vasicek model, where i am trying to find the solution.
I have this term: $-\int_{t}^{T} \sigma \int_{t}^{s} e^{-\kappa(s-u)} d W(u) d s$
I need to change the ...
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Change of numeraire to the forward measure in the Vasicek model
I am working through the Brigo/Mercurio book on Interest Rate Models (Second Edition) and I am having some trouble with the change of numeraire in chapter 3.2.1, page 59 to be exact, formula 3.9. It ...
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Why can a two-factor interest rate model not be used to value a coupon bearing bond as the sum of options on ZCBs
I am currently reading some notes which state that
For one-factor models, the value of a European option on a coupon bond can be calculated as the sum of European options on zero-coupon bonds (ZCBs). ...
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Affine Structure Resolution for the Vasicek model
I would like to now how to solve the PDE of the affine structure under Vasicek.I am delineating the steps:
First let's posit the OU process under a Risk Neutral Measure such as :
\begin{align*}
\...
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Pricing Call Option on Coupon Bond under Vasicek
Consider a the Vascicek model, and let A and B denote the functions such that $P(t,T)=\exp(A(t,T)-B(t,T)r(t))$. We now look at a coupon bond that makes deterministic payments $\alpha_1,...,\alpha_N$ ...
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Simulating exponential Vasicek/Ornstein-Uhlenbeck
I am trying to simulate commodity prices using the exponential Vasicek/Ornstein-Uhlenbeck model from Schwartz 1997 p. 926 Equation (1). I am using the closed form solution from Vega 2018 p. 5 Equation ...
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Vasicek Model (estimation of parameters)
I have a question concerning the "choice" of parameters for the Vasicek model (formula below).
Consider me as a moron with below average level in maths haha.
What I've done is basically run ...
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Affine term structure for CDS
in papres such as https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2686284 (Exploring Mispricing in the Term Structure of CDS Spreads by Robert A. Jarrow, Haitao Li, Xiaoxia Ye, and May Hu) a ...
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Vasicek Short rate simulation - analytical formula vs discretization
I've been using two approaches to simulate Vasicek short rate paths and I'm wondering if one of them is more correct than the other.
The first approach is based on the analytical formula (see code ...
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Monte Carlo price of European option on ZCB under Vasicek short rate
I'm trying to replicate the analytical result from the closed form Vasicek formula for European options on zero-coupon bonds using Monte-Carlo simulation.
The interest rate paths I've simulated seem ...
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Hazard rate and Term structure model
About the paper of Pan and Singleton 2008 “Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads”,
once the lambdas (hazard rates) for the different tenors of the term structure ...
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Multi-period Basel/Vasicek formula
I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis.
Please find below the formula of the Basel Capital (ie. unexpected loss)...
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Difference between Vasicek and Gordy models
I'm trying to understand what Gordy [1] added to Vasicek [2] model (the core of the IRB formula of Basel Accords).
Is it correct to say the Vasicek shows that the portfolio loss conditional on $Y$ ...
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Vasicek model - Bond price and volatility
Why does the bond price under the Vasicek model increase as the rate volatility increases? What is the intuition behind this?
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Choosing which interest rate model to go with?
I've been assigned with the task of modelling zero rate curve. I did it with two models: Vasicek and CIR. Looking at the two curves produced, I can see that one is closer to the observed curve than ...
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