Vasicek (1977)posits a General Mean-Reverting Form for the Short-Rate $d r _ { t } = k \left( \theta - r _ { t } \right) d t + \sigma d W _ { t }$

question 13

Multiple Choice

Vasicek (1977) posits a general mean-reverting form for the short-rate: $d r _ { t } = k \left( \theta - r _ { t } \right) d t + \sigma d W _ { t }$ He then derives,in the absence of arbitrage,a restriction on the market price of risk $\lambda$ of any bond,where $( \mu - r ) / \eta = \lambda$ of any bond,with $\mu$ being the instantaneous return on the bond,and $\eta$ being the bond's instantaneous volatility.The derived restriction is that

• A) \(\lambda\)
• Is a constant.
• B) \(\lambda\)
• May be a function of time
• \(t\)
• ,but not of any other time-
• \(t\)
• Information or of the maturity
• \(T\)
• Of the bond.
• C) \(\lambda\)
• May be a function of the time-
• \(t\)
• Short rate
• \(r _ { t }\)
• ,but not of current time
• \(t\)
• Or of the bond maturity
• \(T\)
• )
• D) \(\lambda\)
• May be a function of time
• \(t\)
• And the time-
• \(t\)
• Short rate
• \(r _ { t }\)
• ,but not of the bond maturity
• \(T\)
• )

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