Interest Rate One-Factor Equilibrium Models

Source: Hull, John C., Options, Futures & Other Derivatives. Fourth edition (2000). Prentice-Hall. P. 567.
Models:
Vasicek, O. 1977 "An Equilibrium Characterization of the term structure." Journal of Financial Economics 5: 177-188.
Cox, Ingersoll, and Ross. "A Theory of the Term Structure of Interest Rates". Econometrica, 53 (1985). 385-407.

Vasicek Model (discrete version)

Simulation of short-te
Δr=α ( b−r ) Δt+σε √ Δt 18.0%
Stochastic process for short-term interest rate r:
a: "strength" at which r is pulled back to g 16.0%
b: long-term equilibrium of short-term rates
s: volatility superimposed (annualized)
14.0%
e: is a random drawing from a standardized normal distribution, F(0,1)

Cox, Ingersoll, Ross Model (discrete version) 12.0%

Δr=α ( b−r ) Δt+ √ rσε √ Δt 10.0%

Parameters as for the Vasicek model.
Because the volatility is proportional to the square root of r, r cannot 8.0%
become negative. As the rates increase, their volatility increases. At the
same time, the model has the same mean-reverting or "pull-back"
properties as the Vasicek model.
6.0%

4.0%
Numerical examples (press F9 to generate new random numbers) 2.0%
Vasicek CIR
Rate r0 at t=0 8.00% 8.00%
Total simulation time (T) 2 2 year(s) 0.0%
"Pullback" a 0.07 0.07 0 0.5
Equilibrium b 6.00% 6.00%
Volatility s 3.00% 10.61%
Dt 0.0067
tice-Hall. P. 567.

ncial Economics 5: 177-188.

ica, 53 (1985). 385-407.

Simulation of short-term interest rates

18.0%

16.0%

14.0% Vasicek

12.0%
Cox et al.
10.0%

8.0% Equilibriu
m line b
6.0%

4.0% Rate at
t=0

2.0%

0.0%
0 0.5 1 Time1.5 2 2.5
 Vasicek Cox et al. Equilibrium line b
Period Time e r + Dr r + Dr 0
0 0 8.00% 8.00% 2
1 0.006667 -0.725934 7.82% 7.82%
2 0.013333 -1.593175 7.43% 7.43% Rate at t=0
3 0.02 2.248584 7.98% 7.96% 0
4 0.026667 0.35656 8.07% 8.05% 0.05
5 0.033333 -1.254604 7.76% 7.74%
Vasicek 6 0.04 -0.280962 7.69% 7.67%
7 0.046667 -0.054744 7.67% 7.66%
8 0.053333 -1.453111 7.32% 7.31%
Cox et al. 9 0.06 1.478217 7.68% 7.66%
10 0.066667 -1.171804 7.39% 7.37%
11 0.073333 1.361312 7.72% 7.69%
12 0.08 -0.789005 7.53% 7.50%
Equilibriu 13 0.086667 -1.439495 7.18% 7.16%
m line b 14 0.093333 -1.90766 6.71% 6.72%
15 0.1 -0.410807 6.61% 6.63%
16 0.106667 -1.36501 6.27% 6.32%
Rate at 17 0.113333 -1.469062 5.91% 6.00%
t=0 18 0.12 1.384859 6.25% 6.30%
19 0.126667 -0.516798 6.13% 6.18%
20 0.133333 -0.468605 6.01% 6.08%
21 0.14 1.197626 6.30% 6.34%
22 0.146667 0.226676 6.36% 6.39%
23 0.153333 2.201237 6.90% 6.87%
24 0.16 -0.25082 6.84% 6.81%
25 0.166667 -0.210716 6.79% 6.76%
26 0.173333 -0.10106 6.76% 6.74%
27 0.18 1.47728 7.12% 7.07%
28 0.186667 0.865918 7.33% 7.27%
29 0.193333 0.154784 7.37% 7.31%
30 0.2 0.304933 7.44% 7.38%
31 0.206667 -0.482263 7.33% 7.26%
32 0.213333 -2.86218 6.62% 6.59%
33 0.22 -0.631428 6.47% 6.45%
34 0.226667 -4.36E-05 6.47% 6.45%
35 0.233333 -0.771382 6.28% 6.28%
36 0.24 -0.276056 6.21% 6.22%
37 0.246667 -0.381692 6.12% 6.14%
38 0.253333 1.310277 6.44% 6.42%
39 0.26 -0.48071 6.32% 6.32%
40 0.266667 -0.64733 6.16% 6.18%
41 0.273333 -0.525143 6.03% 6.06%
42 0.28 1.239687 6.34% 6.33%
43 0.286667 -0.296706 6.26% 6.26%
44 0.293333 0.068469 6.28% 6.28%
45 0.3 0.244623 6.34% 6.33%
46 0.306667 2.248584 6.89% 6.82%
47 0.313333 0.366207 6.98% 6.90%
48 0.32 -0.449019 6.87% 6.80%
49 0.326667 -0.452119 6.76% 6.70%
50 0.333333 0.661068 6.92% 6.84%
51 0.34 -0.161974 6.88% 6.81%
52 0.346667 0.647382 7.04% 6.95%
53 0.353333 0.479817 7.16% 7.06%
54 0.36 -0.614403 7.00% 6.92%
55 0.366667 -0.034036 7.00% 6.91%
56 0.373333 -0.054744 6.98% 6.90%
57 0.38 -0.606002 6.83% 6.76%
58 0.386667 0.243872 6.89% 6.82%
59 0.393333 1.216786 7.19% 7.09%
60 0.4 -0.660861 7.03% 6.94%
61 0.406667 -0.888056 6.81% 6.73%
62 0.413333 0.576686 6.95% 6.86%
63 0.42 -0.198365 6.90% 6.82%
64 0.426667 0.470315 7.02% 6.92%
65 0.433333 -0.400525 6.92% 6.83%
66 0.44 -0.223013 6.86% 6.78%
67 0.446667 2.436693 7.46% 7.33%
68 0.453333 0.378914 7.55% 7.42%
69 0.46 0.339551 7.63% 7.50%
70 0.466667 -0.80954 7.43% 7.31%
71 0.473333 0.851981 7.64% 7.50%
72 0.48 0.757664 7.83% 7.68%
73 0.486667 1.094988 8.10% 7.95%
74 0.493333 -1.070924 7.83% 7.68%
75 0.5 1.073112 8.09% 7.94%
76 0.506667 -0.285834 8.02% 7.87%
77 0.513333 2.212261 8.56% 8.41%
78 0.52 -0.533513 8.43% 8.27%
79 0.526667 0.208276 8.48% 8.32%
80 0.533333 0.205439 8.53% 8.37%
81 0.54 -0.680001 8.36% 8.20%
82 0.546667 -3.121232 7.60% 7.43%
83 0.553333 1.502015 7.96% 7.78%
84 0.56 -0.772303 7.77% 7.59%
85 0.566667 0.043877 7.78% 7.60%
86 0.573333 1.070075 8.05% 7.86%
87 0.58 0.592388 8.19% 8.00%
88 0.586667 0.5417 8.32% 8.13%
89 0.593333 1.168584 8.61% 8.42%
90 0.6 2.646967 9.25% 9.08%
91 0.606667 -0.085924 9.23% 9.06%
92 0.613333 -1.136331 8.95% 8.76%
93 0.62 -0.366713 8.86% 8.67%
94 0.626667 1.630862 9.26% 9.08%
95 0.633333 0.247619 9.32% 9.14%
96 0.64 0.253419 9.38% 9.21%
 97 0.646667 -0.343539 9.29% 9.12%
98 0.653333 -0.631428 9.14% 8.95%
99 0.66 1.274157 9.45% 9.28%
100 0.666667 -1.011254 9.20% 9.01%
101 0.673333 0.594259 9.34% 9.16%
102 0.68 -0.633388 9.18% 9.00%
103 0.686667 0.873719 9.40% 9.22%
104 0.693333 1.264475 9.71% 9.55%
105 0.7 -1.165004 9.42% 9.24%
106 0.706667 0.293468 9.49% 9.32%
107 0.713333 1.009386 9.73% 9.58%
108 0.72 -0.903642 9.51% 9.34%
109 0.726667 -1.830337 9.06% 8.85%
110 0.733333 0.528085 9.19% 8.99%
111 0.74 -0.671297 9.02% 8.81%
112 0.746667 0.125861 9.05% 8.84%
113 0.753333 0.016995 9.06% 8.84%
114 0.76 -0.299382 8.98% 8.77%
115 0.766667 0.735187 9.16% 8.95%
116 0.773333 1.026622 9.41% 9.22%
117 0.78 -0.201255 9.36% 9.16%
118 0.786667 -0.915721 9.13% 8.92%
119 0.793333 -1.454802 8.77% 8.54%
120 0.8 0.73693 8.95% 8.73%
121 0.806667 0.553526 9.09% 8.87%
122 0.813333 0.366207 9.18% 8.96%
123 0.82 1.374464 9.51% 9.32%
124 0.826667 0.375614 9.60% 9.41%
125 0.833333 -1.417509 9.25% 9.04%
126 0.84 1.109095 9.52% 9.32%
127 0.846667 -1.143327 9.24% 9.02%
128 0.853333 -0.161974 9.20% 8.98%
129 0.86 1.879888 9.66% 9.46%
130 0.866667 0.352365 9.74% 9.56%
131 0.873333 -1.317995 9.42% 9.20%
132 0.88 -0.310945 9.34% 9.12%
133 0.886667 -0.15128 9.30% 9.08%
134 0.893333 -0.034036 9.29% 9.07%
135 0.9 0.145764 9.33% 9.10%
136 0.906667 0.012715 9.33% 9.10%
137 0.913333 -2.050388 8.83% 8.57%
138 0.92 1.197822 9.12% 8.87%
139 0.926667 0.801186 9.31% 9.08%
140 0.933333 -1.376634 8.97% 8.71%
141 0.94 -0.565336 8.83% 8.57%
142 0.946667 0.172174 8.87% 8.61%
143 0.953333 -0.989771 8.63% 8.36%
144 0.96 -0.639657 8.47% 8.20%
145 0.966667 -0.878878 8.26% 7.98%
146 0.973333 0.446758 8.36% 8.09%
147 0.98 -0.725339 8.19% 7.91%
148 0.986667 0.888984 8.40% 8.12%
149 0.993333 -1.220114 8.10% 7.82%
150 1 1.0097 8.35% 8.06%
151 1.006667 -0.881755 8.13% 7.85%
152 1.013333 2.436693 8.73% 8.44%
153 1.02 -0.371273 8.64% 8.34%
154 1.026667 0.918271 8.86% 8.57%
155 1.033333 -0.215926 8.80% 8.51%
156 1.04 -0.460312 8.69% 8.40%
157 1.046667 -1.309662 8.37% 8.07%
158 1.053333 1.408864 8.71% 8.41%
159 1.06 -0.13076 8.68% 8.38%
160 1.066667 0.442775 8.79% 8.49%
161 1.073333 1.252422 9.09% 8.80%
162 1.08 -0.497389 8.97% 8.67%
163 1.086667 0.122653 9.00% 8.70%
164 1.093333 0.527348 9.13% 8.84%
165 1.1 -0.755451 8.94% 8.64%
166 1.106667 -1.253332 8.63% 8.32%
167 1.113333 1.001418 8.87% 8.57%
168 1.12 -0.105149 8.85% 8.54%
169 1.126667 -1.266427 8.54% 8.22%
170 1.133333 -1.43161 8.18% 7.87%
171 1.14 0.377349 8.28% 7.96%
172 1.146667 1.49164 8.64% 8.32%
173 1.153333 0.345558 8.72% 8.40%
174 1.16 0.350804 8.81% 8.49%
175 1.166667 0.799695 9.00% 8.69%
176 1.173333 -0.741791 8.82% 8.50%
177 1.18 -0.710774 8.64% 8.32%
178 1.186667 0.493722 8.76% 8.44%
179 1.193333 0.055053 8.78% 8.46%
180 1.2 1.129588 9.05% 8.74%
181 1.206667 -0.242425 8.99% 8.68%
182 1.213333 -0.447836 8.88% 8.56%
183 1.22 -0.234739 8.82% 8.50%
184 1.226667 -0.103689 8.79% 8.47%
185 1.233333 0.771457 8.98% 8.67%
186 1.24 -0.598839 8.83% 8.51%
187 1.246667 -0.711313 8.66% 8.33%
188 1.253333 -1.860313 8.20% 7.86%
189 1.26 -0.215423 8.15% 7.81%
190 1.266667 0.348367 8.23% 7.89%
191 1.273333 -0.827168 8.03% 7.69%
192 1.28 -0.705428 7.85% 7.52%
193 1.286667 -0.130736 7.82% 7.49%
194 1.293333 0.278142 7.89% 7.56%
195 1.3 0.762407 8.07% 7.74%
196 1.306667 1.318988 8.40% 8.05%
197 1.313333 0.213109 8.45% 8.11%
198 1.32 -1.17757 8.16% 7.81%
199 1.326667 2.020701 8.65% 8.30%
200 1.333333 0.623208 8.80% 8.46%
201 1.34 -0.032724 8.79% 8.45%
202 1.346667 -0.975516 8.55% 8.20%
203 1.353333 -1.512732 8.18% 7.82%
204 1.36 0.457475 8.29% 7.93%
205 1.366667 -1.426653 7.94% 7.59%
206 1.373333 0.570359 8.08% 7.72%
207 1.38 -0.578603 7.94% 7.58%
208 1.386667 -0.952948 7.70% 7.35%
209 1.393333 -0.815091 7.50% 7.16%
210 1.4 1.112266 7.78% 7.42%
211 1.406667 0.090864 7.80% 7.44%
212 1.413333 -0.312041 7.72% 7.36%
213 1.42 -0.479695 7.60% 7.25%
214 1.426667 0.977518 7.84% 7.48%
215 1.433333 -0.531748 7.71% 7.35%
216 1.44 -1.830337 7.26% 6.92%
217 1.446667 -0.593202 7.11% 6.79%
218 1.453333 -0.188884 7.07% 6.74%
219 1.46 -0.181467 7.02% 6.70%
220 1.466667 -0.33464 6.94% 6.63%
221 1.473333 -0.371711 6.85% 6.54%
222 1.48 0.016995 6.85% 6.55%
223 1.486667 -1.129547 6.57% 6.30%
224 1.493333 1.590755 6.96% 6.64%
225 1.5 -0.527735 6.83% 6.52%
226 1.506667 0.496442 6.96% 6.63%
227 1.513333 0.017727 6.96% 6.64%
228 1.52 0.480437 7.08% 6.74%
229 1.526667 0.738943 7.26% 6.91%
230 1.533333 0.029607 7.26% 6.92%
231 1.54 0.343534 7.35% 6.99%
232 1.546667 -0.977554 7.11% 6.77%
233 1.553333 -0.49736 6.99% 6.66%
234 1.56 -0.365509 6.90% 6.57%
235 1.566667 0.524856 7.02% 6.69%
236 1.573333 -0.306063 6.95% 6.62%
237 1.58 0.014766 6.95% 6.63%
238 1.586667 -2.958601 6.23% 5.97%
239 1.593333 0.183784 6.27% 6.00%
240 1.6 -0.640836 6.11% 5.87%
241 1.606667 -1.653293 5.71% 5.52%
242 1.613333 -0.094735 5.69% 5.50%
243 1.62 1.024255 5.94% 5.71%
244 1.626667 -0.532467 5.81% 5.60%
245 1.633333 0.168845 5.85% 5.64%
246 1.64 -0.045202 5.84% 5.63%
247 1.646667 -0.236919 5.78% 5.58%
248 1.653333 0.93968 6.01% 5.77%
249 1.66 -0.909772 5.79% 5.58%
250 1.666667 -0.726692 5.61% 5.43%
251 1.673333 -0.804397 5.41% 5.27%
252 1.68 -1.383689 5.07% 5.00%
253 1.686667 0.878396 5.29% 5.17%
254 1.693333 -0.576764 5.15% 5.05%
255 1.7 -0.858485 4.94% 4.89%
256 1.706667 -0.531241 4.81% 4.79%
257 1.713333 0.052113 4.82% 4.80%
258 1.72 0.5942 4.97% 4.91%
259 1.726667 -1.307287 4.65% 4.66%
260 1.733333 1.599084 5.04% 4.96%
261 1.74 0.174439 5.08% 4.99%
262 1.746667 -0.132106 5.05% 4.97%
263 1.753333 -0.583512 4.91% 4.85%
264 1.76 1.89784 5.37% 5.22%
265 1.766667 -0.052447 5.36% 5.21%
266 1.773333 -0.565336 5.22% 5.10%
267 1.78 -0.837554 5.02% 4.93%
268 1.786667 -0.061324 5.00% 4.92%
269 1.793333 0.512354 5.13% 5.02%
270 1.8 -0.362532 5.04% 4.95%
271 1.806667 -1.028867 4.79% 4.75%
272 1.813333 -0.878878 4.58% 4.59%
273 1.82 -0.348658 4.49% 4.52%
274 1.826667 -1.085293 4.23% 4.32%
275 1.833333 -1.032683 3.97% 4.14%
276 1.84 0.452928 4.09% 4.22%
277 1.846667 1.044081 4.34% 4.41%
278 1.853333 -0.320792 4.26% 4.35%
279 1.86 -0.24975 4.20% 4.30%
280 1.866667 1.111602 4.48% 4.51%
281 1.873333 -1.035581 4.22% 4.32%
282 1.88 -0.473993 4.11% 4.23%
283 1.886667 0.825895 4.31% 4.38%
284 1.893333 0.275279 4.38% 4.43%
285 1.9 -1.593692 3.99% 4.14%
286 1.906667 -0.086605 3.97% 4.13%
287 1.913333 -0.07982 3.95% 4.11%
288 1.92 1.202853 4.25% 4.32%
289 1.926667 0.703848 4.42% 4.45%
290 1.933333 1.672317 4.83% 4.76%
291 1.94 -0.458933 4.72% 4.67%
292 1.946667 -0.527376 4.59% 4.57%
293 1.953333 1.99604 5.08% 4.94%
294 1.96 0.640304 5.24% 5.07%
295 1.966667 -0.40917 5.14% 4.99%
296 1.973333 -1.138969 4.86% 4.77%
297 1.98 -0.308058 4.78% 4.71%
298 1.986667 1.111622 5.06% 4.92%
299 1.993333 -1.058053 4.80% 4.72%
300 2 -0.20311 4.75% 4.68%
Equilibrium line b
6.00%
6.00%

Rate at t=0
8.00%
8.00%
Term structure in Vasicek Model Have a a look at the formulas
t 0
Vasicek Term Structure of Interest
Rate r0 at t=0 8.0% 16
9%
Maturity time (T) 2.0 20
8%
"Pullback" a 0.15 15
7%
Equilibrium b 6.0% 60
Instanteanous StDev. of short rate (s) 2.0% 20 6%
5%
Results:
4%
B in Vasicek Model (Hull) 1.73
A in Vasicek Model (Hull) 0.984227 3%
Infinitely-long Rate (Y¥) 5.11% 2%
Vasicek Discount Factor 0.857161 1%
Solution with VBA Function #VALUE!
0%
Vasicek Zero Rate 7.706%
0 5 Time to
10maturity
15
Vasicek volatitility of zero rate sY(t,T) 1.728%

Long-term distribution of r (Steady State Probability Density Function) Vasicek Discount Function
r 5.00%
1.0
P¥ 10.523 10.523 0.9
Mean of P¥ 6.00% 0.8
StDev of P¥ 3.65% 0.7
0.6
Vasicek Model: Steady State Probability Density Function for Spotrate 0.5
r 0.4
0.3
2 2 2 0.2
0.1
-
Spotrate (r)
0 5 Time10to maturity
15
1 1 1
-15% -10% -5% 0% 5% 10% 15% 20% 25%

Formulas
with constants
b: long-term equilibrium of mea
Interest rate process:
dr=a ( b−r ) dt +σ dz a: "pull-back" factor - speed of
s: spot rate volatility
Value of zero=coupon bond: dz standard Wiener process
−B (t , T )r( t)
P(t , T )=A (t ,T )e
with

σ2
A ( t ,T )=exp ( B ( t , T )−T +t )
[ (
2
a b−

a2
2
 σ2

[
−a(T −t )
1−e
(
2
B ( t , T )= a b−
a 2
A ( t ,T )=exp ( B ( t , T )−T +t )
a2
Long-term distribution of r (Steady State Probability Density Function)

σ
P∞=
√ a 1
π σ2
e
−
a( r−b)2
σ2
Thus P¥ is normally distributed with
P∞ ~ Ν b ,
(
√2 a )
Infinitely-long Rate (Y¥) CIR volatitility of zero rate sY(t,T)

σ2 −a ( T−t )
Y ∞=b− +
λσ 1−e B (t , T )
2 a2 a σ Y ( t, T ))=σ =σ
a (T −t ) ( T −t )
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Source:
Hull, John C., Options, Futures & Other Derivatives. Fourth edition (2000). Prentice-Hall. p. 567.
Model:
Vasicek, O. 1977 "An Equilibrium Characterization of the term structure." Journal of Financial Economics 5: 177-188.

Steady-state probability density function formula for Vasicek model from Wilmott, Paul. Paul Wilmott on Quantitative Financ
Formula infinitely long rate from Holden, Craig W. Spreadsheet Modeling in Investments. Prentice Hall. 2002 edition. p.49
Formula volatility zero rates from Jackson, M. Staunton, M. "Advanced Modelling in Finance using Excel and VBA", Wiley F
 Data Table
cek Term Structure of Interest
0.857161
0.001 0.99992
Vasicek Zero 0.5 0.961149
Rate 1 0.92449
Long-term 2 0.857161
equilibrium
3 0.796909
rate
4 0.742768
r at t=0 5 0.693903
6 0.649605
Infinitely long
rate 7 0.609269
8 0.572385
9 0.538524
10 0.50732
5 Time to
10maturity
15 20 25 30 35
15 0.381871
20 0.291715
Vasicek Discount Function 25 0.224452
30 0.173295
Vasicek Discount
Factor

-4.5 -10.43%
-4 -8.61%
-3.5 -6.78%
-3 -4.95%
-2.5 -3.13%
-2 -1.30%
-1.5 0.52%
-1 2.35%
5 Time10to maturity
15 20 25 30 35 -0.5 4.17%
0 6.00%
0.5 7.83%
1 9.65%
1.5 11.48%
2 13.30%
2.5 15.13%
3 16.95%
3.5 18.78%
4 20.61%
4.5 22.43%

with constants
b: long-term equilibrium of mean reverting spot rate process
a: "pull-back" factor - speed of adjustment
s: spot rate volatility
dz standard Wiener process

σ2
−T +t ) (
2
a b−

a2
2
)
−
σ 2 B ( t , T )2
4a ]
 σ2
−T +t ) (
2
a b−

a2
2
)
−
σ 2 B ( t , T )2
4a ]
σ
P∞ ~ Ν b ,
(
√2 a )
where r0 spotrate at t=0
B (t , T ) a: "pull-back" factor - speed of adjustment
=σ s: spot rate volatility

( T −t )

. 567.

cial Economics 5: 177-188.

ul Wilmott on Quantitative Finance, Volume 2, p. 563, John Wiley 2000.

Prentice Hall. 2002 edition. p.49
ce using Excel and VBA", Wiley Finance (2001). p. 238 and file "Bond1.xls".
 Long-term equilibrium rate
8.000% 0 6.00%
7.925% 30 6.00%
7.851%
7.706% r at t=0
7.567% 0 8.00%
7.434%
7.308%
7.190% Infinitely long rate
7.079% 0 5.11%
6.974% 30 5.11%
6.877%
6.786%
6.418%
6.160%
5.976%
5.843%

10.52337
0.0004377
0.0036651 Mean
0.0238994 6.00% -
0.1213712 6.00% 12.018
0.4800323
1.4786035 + StDev
3.5469854 9.65% -
6.6266412 9.65% 12.018
9.6417061
10.925484 - StDev
9.6417061 2.35% -
6.6266412 2.35% 12.018
3.5469854
1.4786035
0.4800323
0.1213712
0.0238994
0.0036651
0.0004377
Term structure CIR Model Have a a look at the formulas
t (nowyear) 0
CIR Term Structure of Interest
Rate r0 at t=0 8.0% 16
9%
Maturity time (T) 2.0 20
8%
"Pullback" a 0.15 15
7%
Equilibrium b 6.0% 60
Instanteanous StDev. of short rate (s) 5.0% 50 6%
Results: 5%
g in CIR Model (Hull) 0.16583 4%
B in CIR Model (Hull) 1.7254
A in CIR Model (Hull) 0.9838 3%
Infinitely-long Rate (Y¥) 5.70% 2%
CIR Discount Factor 0.856974 1%
Solution with VBA Function #VALUE!
0%
CIR Zero Rate 7.717%
0 5 Time to
10maturity
15
CIR volatitility of zero rate sY(t,T) 1.220%

Long-term distribution of r (Steady State Probability Density Function) CIR Discount Function
r 6.00%
1.0
k = 2ab/s2
7.20
0.9
P¥ 17.636 17.636 0.8
Mean of P¥ 6.00% 0.7
StDev of P¥ 2.24% 0.6
0.5
CIR Model: Steady State Probability Density Function for Spotrate r 0.4
0.3
0.2
2 2 2 0.1
-
0 5 Time10to maturity
15
Spotrate (r)

1 1 1
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Formulas CIR Interest Rate Model

with constants

dr=a ( b−r ) dt +σ √ r dz
b: long-term equilibrium of m
Interest rate process: a: "pull-back" factor - speed
s: spot rate volatility
Value of zero=coupon bond: dz standard Wiener process
−B (t , T )r( t)
P( t , T )=A (t ,T )e
with
 γ ( T −t )
2 (e −1 ) 2
B ( t , T )=
( γ +a ) ( eγ ( T −t )−1 ) + 2 γ
A ( t ,T )=
[ (γ + a)
Long-term distribution of r (Steady State Probability Density Function) is gamma distributed
k
2a G(.) is Gamma Function

σ2 ( ) 2 2 a
k
k−1 −2 ar /σ 2−ln ( Γ ( k ) )
Excel worksheetfunction is G

P∞=
Γ (k )
k −1 −2 ar /σ
r e = 2 r e
σ ( ) Mean & standard deviation g

Γ ( Mean )=k
σ
2a
2

2 ab
with k= 2 Γ ( Stdev ) =√ k
σ2
σ 2
Gamma distribution in Excel notation

1 with

f ( x , α , β )= α x α−1 e−x/β a=k

b = (s2)/2a
β Γ (α )
Back to top

Infinitely-long Rate (Y¥) CIR volatitility of zero rate sY(t,T)

Y ∞=
2 ab B( t , T )
( a+γ ) σ Y ( t, T ))=σ √ r 0
( T −t )
Source:
Hull, John C., Options, Futures & Other Derivatives. Fourth edition (2000). Prentice-Hall. p. 570.
Model:
Cox, C.J. Ingersoll, J.E. Ross, S.A. (1985) . "A Theory of the Term Structure of Interest Rates". Econometrica, 53 (1985), p

Steady-state probability density function formula for Vasicek model from Wilmott, Paul. Paul Wilmott on Quantitative Finan

Formula infinitely long rate, volatility zero rates from Jackson, M. Staunton, M. "Advanced Modelling in Finance using Exc
"Bond1.xls".
 Data Table
R Term Structure of Interest
0.856974
0.001 0.99992
0.5 0.961145
CIR Zero Rate
1 0.924463
Long-term 2 0.856974
equilibrium rate 3 0.796375
4 0.74169
r at t=0 5 0.692105
6 0.646938
Infinitely long rate
7 0.605619
8 0.567673
9 0.5327
10 0.500364
5 Time to
10maturity
15 20 25 30 35
15 0.369636
20 0.27579
CIR Discount Function 25 0.206686
30 0.1552
CIR Discount Factor

-4.5 0.00%
-4 0.00%
-3.5 0.00%
-3 0.00%
-2.5 0.41%
-2 1.53%
-1.5 2.65%
-1 3.76%
5 Time10to maturity
15 20 25 30 35 -0.5 4.88%
0 6.00%
0.5 7.12%
1 8.24%
1.5 9.35%
2 10.47%
2.5 11.59%
3 12.71%
3.5 13.83%
4 14.94%
4.5 16.06%

with constants
b: long-term equilibrium of mean reverting spot rate process
a: "pull-back" factor - speed of adjustment
s: spot rate volatility
dz standard Wiener process
 (a+γ ) (T −t ) / 2 2ab / σ 2
2 γe
,T )=
[ ( γ + a ) ( e γ (T −t )−1 ) +2 γ ]
G(.) is Gamma Function
Excel worksheetfunction is GAMMALN(.) which LN of G(.)

Mean & standard deviation gamma distribution

2
σ
Γ ( Mean )=k =b
2a
σ2 b
Γ ( Stdev ) =√ k =
2a 2a
σ
√
b = (s2)/2a

where r0 spotrate at t=0

a: "pull-back" factor - speed of adjustment
s: spot rate volatility

570.

s". Econometrica, 53 (1985), p. 385-407

Wilmott on Quantitative Finance, Volume 2, p. 563, John Wiley 2000.

odelling in Finance using Excel and VBA", Wiley Finance (2001). p. 238 and file
 Long-term equilibrium rate
8.000% 0 6.00%
7.926% 30 6.00%
7.854%
7.717% r at t=0
7.590% 0 8.00%
7.471%
7.360%
7.258% Infinitely long rate
7.164% 0 5.70%
7.078% 30 5.70%
6.998%
6.924%
6.635%
6.441%
6.306%
6.210%

17.63607
0
0 Mean
0 6.00% -
0 6.00% 21.163
0.000857716
0.7831734163 + StDev
6.1633776928 8.24% -
14.327728136 8.24% 21.163
18.785320922
17.636066254 - StDev
13.299310791 3.76% -
8.589998897 3.76% 21.163
4.9439653315
2.6026387617
1.2761002757
0.5904494407
0.2603506092
0.1102224258
0.0450679902