In the Cox-Ingersoll-Ross or CIR Model, Interest Rates Are Specified $d r _ { t } = k \left( \theta - r _ { t } \right) d t + \sigma \sqrt { r _ { t } } d W _ { t }$

question 13

Multiple Choice

In the Cox-Ingersoll-Ross or CIR model, interest rates are specified by the following stochastic process: $d r _ { t } = k \left( \theta - r _ { t } \right) d t + \sigma \sqrt { r _ { t } } d W _ { t }$ One attractive feature of this process relative to the Vasicek interest rate process $d r _ { t } = k \left( \theta - r _ { t } \right) d t + \sigma d W _ { t }$ is that

• A) Interest rates are always non-negative in CIR while they may be negative in the Vasicek model.
• B) There are parameter restrictions which guarantee non-negative stochastic interest rates in the CIR model, but there are no such restrictions possible in the Vasicek model.
• C) It has extra parameters, so can fit observed yield curves better.
• D) It allows for imperfect instantaneous correlation between rates of different maturities, whereas in the Vasicek model, they are perfectly correlated.

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