The initial formulation of Vasicek’s model is very general, with the short-term interest rate being described by a diffusion process. An arbitrage argument, similar to that used to derive the Black–Scholes option pricing formula [8], is applied within this broad framework to determine the partial differential equation satisfied by any contingent claim. A stochastic representation of the bond price results from the solution to this equation. Vasicek then allows more restrictive assumptions to formulate the specific model with which his name is associated.
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© 2004 Simona Svoboda
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Svoboda, S. (2004). The Vasicek Model. In: Interest Rate Modelling. Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9781403946027_1
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DOI: https://doi.org/10.1057/9781403946027_1
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