The Practicality of Vasicek Model in China’s Financial Market

Abstract

In the changing financial market, the price of financial products fluctuates continuously over time. The study of the static term structure of the interest rate on the market can no longer satisfy the actual needs, and the dynamic model is imperative. Compared with the static term structure, the dynamic model introduces a stochastic differential term on the basis of the static term structure model of interest rate. This paper shows some relevant models including Vasicek Model, Single-Factor Dynamic Model, Multi-Factor Dynamic Model, and Kalman Filter method. To conclude, in the multi-factor dynamic interest rate term structure model, Kalman Filter has many benefits. However, it still has actual limitations. The multi-factor Vasicek model still needs some analysis to find the error and do the correction. In the research of bond pricing, risk management, and other aspects, the multi-factor model should be the main direction.