Understanding Random Walk Model in Interest Rates

Very Easy Term Structure Dynamics Interest Rate Models

Interest rate models are used to understand the behavior of interest rates over time. The simplest form of interest rate model is the random walk model, which suggests that changes in interest rates are unpredictable and follow a random path.

Which of the following statements best describes the random walk model of interest rates?

Interest rates move in a predictable linear trend over time.

Future changes in interest rates are independent of past movements.

Interest rates tend to revert to a long-term average over time.

Hint

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