"No-Arbitrage" Models of the Interest Rate Differ from "Equilibrium" Models

question 11

Multiple Choice

"No-arbitrage" models of the interest rate differ from "equilibrium" models of the interest rate in that

• A) They have a larger number of free parameters enabling them to fit the yield curve exactly.
• B) They do not admit arbitrage whereas an equilibrium model may admit arbitrage under some conditions.
• C) Equilibrium models were derived in the academic literature whereas whereas no-arbitrage models were developed mainly by practitioners.
• D) They allow for the possibility that the market is in disequilibrium

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Definitions:

Z-scores

Standardized scores that measure the distance of a data point from the mean, expressed in terms of standard deviations.

Shaded Area

In graphical representations, the region covered by a pattern or color to emphasize or illustrate specific data areas or values.

Distribution

Describes the way values of a variable or set of data are spread or distributed across possible values or intervals.

Z-score

A measure that indicates how many standard deviations an element is from the mean of its distribution.