Volatility & Derivatives
We will introduce in this post stochastic volatility models. They assume that the asset price but also its variance follow stochastic processes. Such models are
August 29, 2024
The Cox-Ingersoll-Ross (CIR) Model
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February 24, 2024
The Cox-Ingersoll-Ross (CIR) model is a stochastic interest rate model used in finance to describe the evolution of interest rates.
The model was introduced in 1985 as an alternative to the Vasicek model (The Vasicek Model).
It assumes that the short-term interest rate follows a mean-reverting stochastic process, it does not allow negative interest rates while preserving analytical solution for bond pricings.
It is also used in the popular stochastic volatility Heston model to model the stochastic variance (The Heston Model for Option Pricing).
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