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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)


Si
Δr=α  b−r  Δtσε  Δt 14.0%
Stochastic process for short-term interest rate r:
α : "strength" at which r is pulled back to γ 12.0%
b: long-term equilibrium of short-term rates
σ : volatility superimposed (annualized)

ε : is a random drawing from a standardized normal distribution, 10.0%


Φ (0,1)
Cox, Ingersoll, Ross Model (discrete version)
8.0%
Δ r=α  b−r  Δ t  r σ ε Δ t
Parameters as for the Vasicek model.
6.0%
Because the volatility is proportional to the square root of r, r cannot
become negative. As the rates increase, their volatility increases. At the
same time, the model has the same mean-reverting or "pull-back" 4.0%
properties as the Vasicek model.

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

ancial Economics 5: 177-188.


ica, 53 (1985). 385-407.

Simulation of short-term interest rates


14.0%

12.0%

10.0%

8.0% Vasicek
Cox et al.
6.0% Equilibrium line b
Rate at t=0

4.0%

2.0%

0.0%
0 0.5 1 1.5 2 2.5
Time
Vasicek Cox et al. Equilibrium line b
Period Time ε r + ∆r r + ∆r 0
0 0 8.00% 8.00% 2
1 0.01 1.52 7.98% 7.98%
2 0.01 0.66 7.82% 7.82% Rate at t=0
3 0.02 -0.47 7.59% 7.60% 0
4 0.03 -1.4 7.50% 7.50% 0.05
5 0.03 -0.65 7.79% 7.79%
6 0.04 1.39 7.87% 7.87%
7 0.05 0.7 7.72% 7.71%
8 0.05 -2.06 7.46% 7.46%
Vasicek 9 0.06 -0.41 7.16% 7.17%
Cox et al. 10 0.07 -0.33 6.95% 6.97%
11 0.07 -0.93 6.78% 6.81%
Equilibrium line b
12 0.08 0.08 7.29% 7.28%
Rate at t=0 13 0.09 0.43 6.91% 6.92%
14 0.09 -1.23 6.79% 6.81%
15 0.1 -0.86 7.15% 7.14%
16 0.11 1.27 6.91% 6.91%
17 0.11 -1.72 6.65% 6.68%
18 0.12 0.28 6.82% 6.83%
19 0.13 -0.78 6.69% 6.71%
20 0.13 -0.32 6.60% 6.63%
21 0.14 -1.8 7.07% 7.05%
22 0.15 1.61 7.22% 7.20%
23 0.15 0.44 7.40% 7.37%
24 0.16 0.1 7.39% 7.35%
25 0.17 -1.53 7.05% 7.03%
26 0.17 1.67 7.12% 7.10%
27 0.18 0.51 7.30% 7.26%
28 0.19 -0.47 7.24% 7.21%
29 0.19 1.87 7.18% 7.15%
30 0.2 -0.43 7.33% 7.29%
31 0.21 -0.12 7.41% 7.36%
32 0.21 1.32 7.68% 7.63%
33 0.22 -1.4 8.29% 8.22%
34 0.23 0.73 8.49% 8.43%
35 0.23 2.2 8.30% 8.23%
36 0.24 -0.42 8.59% 8.52%
37 0.25 0.48 8.54% 8.47%
38 0.25 0.65 8.53% 8.46%
39 0.26 -0.36 8.05% 7.97%
40 0.27 -1.96 8.07% 7.99%
41 0.27 -1.2 8.18% 8.10%
42 0.28 0.09 8.03% 7.94%
43 0.29 0.14 8.03% 7.95%
44 0.29 0.78 8.19% 8.11%
45 0.3 0.37 8.24% 8.16%
46 0.31 0.68 8.20% 8.12%
47 0.31 0.47 8.52% 8.44%
48 0.32 0.49 8.67% 8.59%
49 0.33 -0.35 8.46% 8.38%
50 0.33 1.27 8.25% 8.16%
51 0.34 -1.53 7.90% 7.81%
52 0.35 -0.26 7.67% 7.59%
53 0.35 1.01 8.05% 7.96%
54 0.36 0.62 8.30% 8.20%
55 0.37 1.53 8.40% 8.30%
56 0.37 1.32 7.91% 7.80%
57 0.38 0.48 7.88% 7.78%
58 0.39 0.33 7.83% 7.73%
59 0.39 -0.75 7.79% 7.69%
60 0.4 0.4 8.05% 7.94%
61 0.41 1.81 7.80% 7.70%
62 0.41 0.46 7.41% 7.30%
63 0.42 0.15 7.55% 7.44%
64 0.43 -1.69 7.30% 7.20%
65 0.43 -0.14 7.55% 7.44%
66 0.44 0.12 7.94% 7.81%
67 0.45 -0.3 7.49% 7.37%
68 0.45 -1.12 7.34% 7.23%
69 0.46 -0.55 7.29% 7.18%
70 0.47 0.65 6.92% 6.83%
71 0.47 -1.01 7.12% 7.02%
72 0.48 -0.24 6.82% 6.73%
73 0.49 -0.59 6.71% 6.63%
74 0.49 0.56 6.59% 6.52%
75 0.5 -0.89 6.84% 6.75%
76 0.51 1.41 7.15% 7.03%
77 0.51 -0.08 7.33% 7.20%
78 0.52 1.1 7.50% 7.36%
79 0.53 0.27 7.57% 7.43%
80 0.53 0.95 8.02% 7.86%
81 0.54 0.71 8.42% 8.26%
82 0.55 0.44 8.55% 8.39%
83 0.55 -0.75 8.29% 8.12%
84 0.56 0.27 8.58% 8.42%
85 0.57 -0.24 8.61% 8.45%
86 0.57 -0.98 8.81% 8.66%
87 0.58 0.03 9.14% 9.00%
88 0.59 -1.35 8.55% 8.37%
89 0.59 0.82 8.36% 8.17%
90 0.6 0.64 8.26% 8.07%
91 0.61 0.66 8.53% 8.34%
92 0.61 0.7 8.45% 8.27%
93 0.62 -0.21 8.38% 8.20%
94 0.63 -0.51 8.44% 8.25%
95 0.63 0.86 8.46% 8.27%
96 0.64 1.08 8.28% 8.10%
97 0.65 1.05 8.30% 8.12%
98 0.65 -0.89 8.34% 8.16%
99 0.66 2.41 8.35% 8.16%
100 0.67 -1.07 8.77% 8.59%
101 0.67 1.47 8.85% 8.68%
102 0.68 -1.04 8.73% 8.55%
103 0.69 0.12 8.36% 8.17%
104 0.69 -0.82 8.77% 8.58%
105 0.7 1.09 8.85% 8.66%
106 0.71 0.62 9.19% 9.01%
107 0.71 -1.14 9.44% 9.28%
108 0.72 -0.45 9.37% 9.20%
109 0.73 0.25 9.47% 9.32%
110 0.73 0.63 9.45% 9.30%
111 0.74 -1.01 9.36% 9.20%
112 0.75 -0.36 9.44% 9.28%
113 0.75 -0.24 9.20% 9.02%
114 0.76 -0.3 9.19% 9.02%
115 0.77 1.82 9.20% 9.03%
116 0.77 0.87 9.34% 9.17%
117 0.78 0.11 9.20% 9.03%
118 0.79 -0.05 9.16% 8.98%
119 0.79 1.27 9.30% 9.13%
120 0.8 -0.42 9.30% 9.13%
121 0.81 -0.78 9.48% 9.33%
122 0.81 0.36 9.53% 9.38%
123 0.82 -1.3 9.83% 9.71%
124 0.83 0.34 9.60% 9.45%
125 0.83 1.62 9.36% 9.19%
126 0.84 1.29 9.32% 9.14%
127 0.85 -0.02 9.26% 9.08%
128 0.85 0.84 9.39% 9.22%
129 0.86 -1.35 9.95% 9.82%
130 0.87 -0.04 10.30% 10.21%
131 0.87 1.57 10.40% 10.32%
132 0.88 -2.09 10.47% 10.40%
133 0.89 0.34 10.29% 10.20%
134 0.89 -0.03 10.44% 10.37%
135 0.9 -0.76 10.48% 10.41%
136 0.91 -0.01 10.74% 10.71%
137 0.91 -0.77 10.83% 10.82%
138 0.92 -0.38 10.78% 10.76%
139 0.93 0.93 10.61% 10.56%
140 0.93 0.91 10.50% 10.43%
141 0.94 -1.36 10.79% 10.76%
142 0.95 2.05 10.85% 10.84%
143 0.95 -0.92 11.25% 11.30%
144 0.96 -0.02 10.84% 10.82%
145 0.97 -0.35 10.53% 10.45%
146 0.97 -1.06 10.50% 10.42%
147 0.98 -0.52 10.68% 10.62%
148 0.99 1.32 10.61% 10.55%
149 0.99 0.31 10.91% 10.89%
150 1 -0.85 10.89% 10.87%
151 1.01 -0.69 11.22% 11.25%
152 1.01 0.99 11.32% 11.37%
153 1.02 0.99 10.94% 10.92%
154 1.03 -0.4 11.14% 11.16%
155 1.03 -0.07 11.38% 11.43%
156 1.04 0.8 11.20% 11.22%
157 1.05 -0.69 11.01% 11.00%
158 1.05 1.82 10.84% 10.79%
159 1.06 0.22 11.21% 11.23%
160 1.07 -0.43 11.02% 11.00%
161 1.07 -0.12 10.78% 10.72%
162 1.08 0.07 10.84% 10.79%
163 1.09 -0.38 11.07% 11.06%
164 1.09 -1.37 11.01% 10.98%
165 1.1 -2.1 10.90% 10.86%
166 1.11 0.19 10.84% 10.79%
167 1.11 0.2 10.67% 10.60%
168 1.12 -0.71 11.19% 11.20%
169 1.13 1.47 11.42% 11.46%
170 1.13 -0.24 11.42% 11.46%
171 1.14 -1.58 11.29% 11.31%
172 1.15 -2.16 11.42% 11.47%
173 1.15 -0.3 11.11% 11.10%
174 1.16 -0.72 10.95% 10.90%
175 1.17 0.02 11.12% 11.10%
176 1.17 0.66 10.91% 10.86%
177 1.18 -0.31 11.05% 11.02%
178 1.19 0.87 11.06% 11.04%
179 1.19 0.39 11.12% 11.11%
180 1.2 -3.14 11.19% 11.18%
181 1.21 -2.53 12.13% 12.30%
182 1.21 1.27 12.14% 12.31%
183 1.22 0.99 11.98% 12.12%
184 1.23 1.02 11.60% 11.65%
185 1.23 -0.71 11.48% 11.51%
186 1.24 -0.49 11.16% 11.12%
187 1.25 0.34 11.03% 10.97%
188 1.25 -0.04 11.05% 10.99%
189 1.26 -0.59 10.94% 10.87%
190 1.27 -0.77 10.77% 10.66%
191 1.27 0.9 10.93% 10.85%
192 1.28 0.61 10.93% 10.86%
193 1.29 0.67 11.18% 11.14%
194 1.29 -0.96 11.22% 11.20%
195 1.3 0.89 11.54% 11.57%
196 1.31 0.73 11.31% 11.30%
197 1.31 0.66 11.82% 11.91%
198 1.32 -0.27 11.58% 11.61%
199 1.33 -2.53 11.33% 11.31%
200 1.33 0.45 11.54% 11.56%
201 1.34 0.84 11.64% 11.68%
202 1.35 -1.53 11.62% 11.65%
203 1.35 0.49 11.62% 11.66%
204 1.36 -0.9 11.80% 11.87%
205 1.37 -0.53 11.94% 12.04%
206 1.37 -0.86 11.78% 11.85%
207 1.38 1.46 12.28% 12.46%
208 1.39 0.46 12.24% 12.40%
209 1.39 -2.73 12.43% 12.64%
210 1.4 0.2 12.47% 12.70%
211 1.41 0.46 12.05% 12.16%
212 1.41 -2.37 12.23% 12.40%
213 1.42 -0.06 11.91% 12.00%
214 1.43 0.05 11.79% 11.84%
215 1.43 1.06 12.03% 12.15%
216 1.44 0.58 11.98% 12.07%
217 1.45 0.95 11.91% 12.00%
218 1.45 -0.03 11.65% 11.68%
219 1.46 -0.83 12.05% 12.16%
220 1.47 -1.24 12.21% 12.35%
221 1.47 0.55 12.13% 12.26%
222 1.48 -2.07 12.26% 12.42%
223 1.49 0.98 12.09% 12.21%
224 1.49 -0.11 11.90% 11.98%
225 1.5 -0.89 11.75% 11.80%
226 1.51 0.38 11.50% 11.49%
227 1.51 -0.76 11.44% 11.42%
228 1.52 1.48 11.28% 11.23%
229 1.53 -1.7 11.16% 11.09%
230 1.53 -0.74 11.20% 11.13%
231 1.54 0.26 10.82% 10.69%
232 1.55 1.01 11.33% 11.28%
233 1.55 -0.55 10.86% 10.71%
234 1.56 -0.55 10.90% 10.76%
235 1.57 -1.94 11.06% 10.96%
236 1.57 0.23 11.23% 11.14%
237 1.58 -0.03 11.46% 11.43%
238 1.59 1.69 11.61% 11.60%
239 1.59 -0.62 11.39% 11.34%
240 1.6 -0.02 11.46% 11.42%
241 1.61 0.09 11.34% 11.28%
242 1.61 1.61 11.15% 11.06%
243 1.62 0 11.09% 10.98%
244 1.63 -2.24 11.03% 10.92%
245 1.63 -0.09 11.05% 10.94%
246 1.64 -0.38 10.89% 10.74%
247 1.65 0.62 11.11% 11.00%
248 1.65 -0.54 11.48% 11.44%
249 1.66 1 11.41% 11.36%
250 1.67 1.5 11.59% 11.58%
251 1.67 -0.25 11.71% 11.71%
252 1.68 0.12 11.89% 11.94%
253 1.69 1.67 11.87% 11.91%
254 1.69 -0.72 12.24% 12.36%
255 1.7 -2.54 11.35% 11.26%
256 1.71 -1.08 11.52% 11.45%
257 1.71 1.2 11.19% 11.06%
258 1.72 -0.74 11.12% 10.98%
259 1.73 -1.47 10.57% 10.34%
260 1.73 1.48 10.51% 10.28%
261 1.74 -0.11 10.94% 10.76%
262 1.75 0.45 10.59% 10.36%
263 1.75 0.75 10.52% 10.27%
264 1.76 0.67 11.07% 10.90%
265 1.77 1.83 11.16% 11.00%
266 1.77 0.84 10.89% 10.69%
267 1.78 -0.41 11.05% 10.87%
268 1.79 -0.12 11.03% 10.86%
269 1.79 0.68 11.31% 11.18%
270 1.8 0.27 11.65% 11.58%
271 1.81 1.59 11.34% 11.21%
272 1.81 -0.56 11.13% 10.95%
273 1.82 0.14 10.86% 10.65%
274 1.83 -0.14 10.87% 10.65%
275 1.83 -0.52 10.93% 10.72%
276 1.84 -2.09 11.04% 10.85%
277 1.85 0.83 11.21% 11.05%
278 1.85 -1.86 11.16% 10.99%
279 1.86 -0.49 11.23% 11.07%
280 1.87 0.35 10.98% 10.78%
281 1.87 1.81 10.76% 10.53%
282 1.88 0.56 10.63% 10.38%
283 1.89 -0.89 10.99% 10.79%
284 1.89 1.39 11.09% 10.91%
285 1.9 1.64 10.91% 10.70%
286 1.91 -0.87 11.28% 11.12%
287 1.91 -1.58 11.22% 11.06%
288 1.92 0.97 11.10% 10.92%
289 1.93 -0.2 11.00% 10.79%
290 1.93 -1.14 10.95% 10.74%
291 1.94 0.72 11.10% 10.91%
292 1.95 1.17 10.96% 10.75%
293 1.95 0.85 10.96% 10.75%
294 1.96 0.1 10.67% 10.41%
295 1.97 0.33 10.52% 10.25%
296 1.97 0.74 10.27% 9.96%
297 1.98 -0.42 10.11% 9.78%
298 1.99 1.87 9.59% 9.21%
299 1.99 -0.76 9.68% 9.30%
300 2 -1.34 9.40% 9.00%
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 Te
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 6%
Instanteanous StDev. of short rate (σ) 2.0% 20
5%
4%
Results:
B in Vasicek Model (Hull) 0.00 3%
A in Vasicek Model (Hull) 1 2%
Infinitely-long Rate (Y∞) 5.11% 1%
Vasicek Discount Factor 0.999920 0%
Solution with VBA Function #VALUE! 0 5 10 15 2
Vasicek Zero Rate 0.004%
Vasicek volatitility of zero rate σY(t,T) Time to matur
0.001%

Long-term distribution of r (Steady State Probability Density Function) Vasicek


r 5.00% 1.0
P∞ 0.000 10.523 1.0
Mean of P∞ 6.00%
StDev of P∞ 1.0
3.65%
Vasicek Model: Steady State Probability Density Function for Spotrate r 1.0

2 2 2 1.0

1.0

1.0
0 5 10 15
1 1 1 Time to matu
-15% -10% -5% 0% 5% 10% 15% 20% 25%
Spotrate (r)

Formulas
with constants
b: long-term equilibrium of mea
Interest rate process:
d r=a  b−r  d tσ d z a: "pull-back" factor - speed of a
σ: spot rate volatility
Value of zero=coupon bond: dz standard Wiener process
P t ,T = At ,T e −B t ,T r  t 
with

[
A t , T =exp  B  t , T −T t   a b− 2

a2
σ2
2
B  t , T =
1−e−a  T−t 
a
[
A t , T =exp  B  t , T −T t 

Long-term distribution of r (Steady State Probability Density Function)


 2
a b−

a2
σ2
2

P ∞=
 a 1
π σ2
e

a  r−b  2
σ2
Thus P∞ is normally distributed with
P∞~ Ν b ,  σ
 2a 
Infinitely-long Rate (Y∞) CIR volatitility of zero rate σY(t,T)

Y ∞ =b−
σ2

λσ 1−e −a T −t  Bt ,T 
2a 2 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
Vasicek Term Structure of Interest Data Table
1
0 1
Vasicek Zero Rate
0.5 1
Long-term
equilibrium rate 1 1
r at t=0 2 1
Infinitely long rate
3 1
4 1
5 1
6 1
7 1
8 1
5 10 15 20 25 30 35 9 1
10 1
Time to maturity
15 1
20 1
Vasicek Discount Function 25 1
Vasicek Discount 30 1
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%
5 10 15 20 25 30 35
-1 2.35%
Time to maturity -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
σ: spot rate volatility
dz standard Wiener process

−T t   a b− 2

a2
σ2
2
−
σ 2 B  t , T 2
4a ]
−T t   2
a b−

a2
σ2
2


σ 2 B  t , T 2
4a ]
P∞~ Ν b ,  σ
 2a 
where r0 spotrate at t=0
Bt ,T  a: "pull-back" factor - speed of adjustment
=σ σ: spot rate volatility

 T −t 
p. 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%
0.016% 30 6.00%
0.008%
0.004% r at t=0
0.003% 0 8.00%
0.002%
0.002%
0.001% Infinitely long rate
0.001% 0 5.11%
0.001% 30 5.11%
0.001%
0.001%
0.001%
0.000%
0.000%
0.000%

0.00044
0
0 Mean
0 6.00% -
0 6.00% 0.000
0
0 + StDev
0 9.65% -
0 9.65% 0.000
0
0 - StDev
0 2.35% -
0 2.35% 0.000
0
0
0
0
0
0
0
Term structure CIR Model Have a a look at the formulas
t (nowyear) 0 CIR Te
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 6%
Instanteanous StDev. of short rate (σ) 5.0% 50
5%
Results:
4%
γ in CIR Model (Hull) 0.16583
B in CIR Model (Hull) 0.0010 3%
A in CIR Model (Hull) 1.0000 2%
Infinitely-long Rate (Y∞) 5.70% 1%
CIR Discount Factor 0.999920 0%
Solution with VBA Function #VALUE! 0 5 10 15
CIR Zero Rate 0.004%
CIR volatitility of zero rate σY(t,T) Time to ma
0.001%

Long-term distribution of r (Steady State Probability Density Function) CIR


r 6.00% 1.0
k = 2ab/σ2 7.20
1.0
P∞ 17.636 17.636
Mean of P∞ 6.00% 1.0
StDev of P∞ 2.24% 1.0
CIR Model: Steady State Probability Density Function for Spotrate r
1.0
2 2 2
1.0

1.0
0 5 10 15
Time to
1 1 1
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Spotrate (r)

Formulas CIR Interest Rate Model


with constants

Interest rate process: d r=a  b−r  d t σ  r d z b: long-term equilibrium of m


a: "pull-back" factor - speed
σ: spot rate volatility
Value of zero=coupon bond: dz standard Wiener process
P  t ,T = At , T  e−B  t ,T r  t 
with
2  e γ T −t −1 
B  t , T =
 γa   e γ  T −t  −1 2γ
A t , T =
[  γa 

Long-term distribution of r (Steady State Probability Density Function) is gamma distributed


k
2a
 
Γ(.) is Gamma Function
Excel worksheetfunction is G

σ2
k

P ∞=
Γ k
k −1 −2 ar/σ
r e
2 2a
= 2 r e
σ  
k −1 −2 ar/ σ 2 −ln  Γ  k   Mean & standard deviation g

Γ  Mean= k
σ2
2a
2ab
with k= 2 Γ  Stdev =  k
σ
σ 2
Gamma distribution in Excel notation

1 with
 
f x ,α , β = α x α−1 e−x/ β α=k
β = (σ2)/2a
β Γ  α
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Infinitely-long Rate (Y∞) CIR volatitility of zero rate σY(t,T)

Y ∞=
2 ab B t , T 
 aγ  σ Y  t ,T  =σ  r0
 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),

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".
CIR Term Structure of Interest Data Table
1
0 1
CIR Zero Rate
0.5 1
Long-term
equilibrium rate 1 1
r at t=0 2 1
Infinitely long rate 3 1
4 1
5 1
6 1
7 1
8 1
5 10 15 20 25 30 35 9 1
10 1
Time to maturity
15 1
20 1
CIR Discount Function 25 1
CIR Discount 30 1
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%
5 10 15 20 25 30 35
-1 3.76%
Time to maturity -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
σ: spot rate volatility
dz standard Wiener process
2 ab/σ 2

, T =
[ 2γe a γ  T −t / 2
 γa   e γ T −t −1  2γ ]
Γ(.) is Gamma Function
Excel worksheetfunction is GAMMALN(.) which LN of Γ(.)

Mean & standard deviation gamma distribution

σ2
Γ  Mean= k =b
2a
σ2
Γ  Stdev =  k =
2a
b
2a
σ

where r0 spotrate at t=0


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

570.

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

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

Modelling in Finance using Excel and VBA", Wiley Finance (2001). p. 238 and file
Long-term equilibrium rate
8.000% 0 6.00%
0.016% 30 6.00%
0.008%
0.004% r at t=0
0.003% 0 8.00%
0.002%
0.002%
0.001% Infinitely long rate
0.001% 0 5.70%
0.001% 30 5.70%
0.001%
0.001%
0.001%
0.000%
0.000%
0.000%

17.63607
17.64
17.64 Mean
17.64 6.00% -
17.64 6.00% 21.163
17.64
17.64 + StDev
17.64 8.24% -
17.64 8.24% 21.163
17.64
17.64 - StDev
17.64 3.76% -
17.64 3.76% 21.163
17.64
17.64
17.64
17.64
17.64
17.64
17.64