Understanding the Vasicek Model Characteristics

Very Easy Term Structure Dynamics Interest Rate Models

In the context of fixed income securities, understanding how interest rates behave over time is crucial for assessing the value of bonds.

One of the simplest models to understand the dynamics of interest rates is known as the Vasicek model. This model assumes that interest rates are influenced by a long-term mean rate and are subject to random fluctuations.

Which of the following statements best describes a characteristic of the Vasicek model?

Interest rates follow a geometric Brownian motion.

Interest rates revert to a long-term mean over time.

Interest rates are solely driven by macroeconomic factors.

Hint

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