CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

The main shortcoming of the Vasicek model is that:

A. Interest rates may become negative, although the probability is fairly low.
B. The model is one-factor, meaning that there is only one stochastic driver of the process.
C. Interest rates volatility is assumed to be constant, which is not realistic.
Correct Answer: A

Like the CIR model, the Vasicek model is also a one-factor modeling method. However, the Vasicek model allows for negative interest rates. This is the biggest advantage of the CIR model.

User Contributed Comments 1

User Comment
JNW1980 Why wouldn't this be the other way around? Reality is showing interest rates can indeed be negative. Wouldn't a model that accounts for that be better than one that doesn't all else given equal?
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