Blog Home / Financial Terms / Cox Ingersoll Ross

Cox Ingersoll Ross

Cox-Ingersoll-Ross (CIR) model incorporates the basis point volatility increases proportionally to the square root of the rate (i.e., σ√r)

Cox-Ingersoll-Ross (CIR) model incorporates the basis point volatility increases proportionally to the square root of the rate (i.e., σ√r) and dr increases at a decreasing rate, and σ is constant.

The CIR model is as follows: dr = k(θ − r)dt + σ√r dw.

The lognormal model shows that basis point volatility increases with the short-term rate. An important property of the lognormal model is that the yield volatility, σ, is constant, but basis point volatility increases with the level of the short-term rate.

Specifically, basis point volatility is equal to σr and the functional form of the model, where σ is constant and dr increases at σr, is:
dr = ardt + σrdw

Why is COX-INGERSOLL-ROSS (CIR) important?

For both the CIR and the lognormal models, if the short-term rate is not negative, a positive drift implies that the short-term rate cannot become negative.

Owais Siddiqui
1 min read
Related:
Financial TermsCPD
Dow Theory: Understanding the Primary Trend and the Secondary Trend
Sagar Pujari 04 July 2022
Financial TermsFRM
What is Standard Deviation?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Hedging,Types and Importance
Owais Siddiqui 19 September 2022
Financial TermsFRM
What is Hedging?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Variance
Owais Siddiqui 19 September 2022

Shares

Leave a comment

Your email address will not be published. Required fields are marked *