Understanding the Vasicek Model

Very Easy Term Structure Dynamics Interest Rate Models

In the context of fixed income securities, interest rate models are essential for understanding the term structure of interest rates and predicting future interest rates. One frequently discussed model is the Vasicek model, which is based on the assumption of mean reversion in interest rates. Please answer the following question about interest rate dynamics.

The Vasicek model assumes that interest rates will always increase over time.

The Vasicek model incorporates the concept of mean reversion in interest rates.

The Vasicek model predicts that future interest rates are completely independent of past interest rates.

Hint

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