What is Cox-Ingersoll-Ross model (CIR model) ?

Definition of Cox-Ingersoll-Ross model (CIR model)

Definition of Cox-Ingersoll-Ross model (CIR model)

Cox-Ingersoll-Ross model (CIR model) is used as a mathematical formula to model movements of interest rate that are driven by an only source of market risk. CIR model considers that interest rates in short-term can be signified through square root diffusion model having mean reversion. For valuation of interest rate derivatives, CIR model is often used.

Cox-Ingersoll-Ross model (CIR model)

In 1985, CIR model was created by John Cox, Jonathan Ingersoll and Stephen Ross as a branch of another named as Vasicek Interest Rate model. Vasicek model is another one-factor modeling method just like CIR model. Conversely, negative interest rates are allowed by the Vasicek model. CIR model holds this as its biggest advantage.

 

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