Understanding Vasicek Model Characteristics

Medium Term Structure Dynamics Interest Rate Models

In the context of interest rate modeling, the Vasicek model is a popular one due to its mean-reversion property. The Vasicek model suggests that interest rates follow a stochastic process where the rate reverts to a long-term mean over time. In an examination of the yielded equation from this model, which of the following best describes the characteristic of interest rate movements according to the Vasicek model?

Interest rates are volatile and follow a random walk without any long-term mean.

Interest rates fluctuate around a deterministic trend without volatility.

Interest rates revert to a long-term mean, capturing both volatility and temporal dynamics.

Hint

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