Mastering Python for Finance - Second Edition

The Cox-Ingersoll-Ross model

The Cox-Ingersoll-Ross (CIR) model is a one-factor model that was proposed to address the negative interest rates found in the Vasicek model. The process is given as follows:

The term increases the standard deviation as the short-rate increases. Now the vasicek() function can be rewritten as the CIR model in Python:

In [ ]:    import math    import numpy as np    def CIR(r0, K, theta, sigma, T=1.,N=10,seed=777):                np.random.seed(seed)        dt = T/float(N)            rates = [r0]        for i in range(N):            dr = K*(theta-rates[-1])*dt + \ sigma*math.sqrt(rates[-1])*\ ...