It is well known that the CIR model, as introduced in 1985, is inadequate for modelling the current market environment with negative short rates, $ r(t) $. Moreover, in the CIR model, the stochastic part goes to zero with the rates, neither volatility nor long term mean change with time, or fit with skewed (fat tails) distribution of $ r(t) $, etc. To overcome the limitations of the CIR, several different approaches have been proposed to date: multi-factor models such as the Hull \& White or the Chen models to the CIR++ by Brigo \& Mercurio. Here, we explain how our extension of the CIR framework may fit well to market short interest rates.
A New Approach to CIR Short-Term Rates Modelling
Giuseppe Orlando;Rosamaria Mininni;
2018-01-01
Abstract
It is well known that the CIR model, as introduced in 1985, is inadequate for modelling the current market environment with negative short rates, $ r(t) $. Moreover, in the CIR model, the stochastic part goes to zero with the rates, neither volatility nor long term mean change with time, or fit with skewed (fat tails) distribution of $ r(t) $, etc. To overcome the limitations of the CIR, several different approaches have been proposed to date: multi-factor models such as the Hull \& White or the Chen models to the CIR++ by Brigo \& Mercurio. Here, we explain how our extension of the CIR framework may fit well to market short interest rates.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
