MODELING THE TERM STRUCTURE OF INTEREST RATES BASED ON THE ONE-FACTOR VASICEK MODEL

Abstract

The interest rates and models of their dynamics have become one of the most important areas of modern financial theory in the last two decades. Although the appearance of financial derivatives on fixed-income securities has contributed greatly to the development of more innovative and more precise models that describe the dynamics of interest rates, however, there are still some original and simpler models which have not been forgotten. Vasicek model, which is shown in this paper, is one of the first and most popular interest rate models, which, due to its simplicity, is still actively used. The aim of this paper is to show the way in which one-factor Vasicek model is used in the formation of the term structure of interest rates, as well as to show how to estimate the parameters of this model using historical data of interest rates. Estimation of the parameters is shown in a series of simulated data using the method of least squares and maximum likelihood estimation method.