Stochastic volatility, a new approach for vasicek model with stochastic volatility

Thesis Type: Post Graduate

Institution Of The Thesis: Middle East Technical University, Turkey

Approval Date: 2005

Thesis Language: English

Student: Serkan Zeytun



In the original Vasicek model interest rates are calculated assuming that volatility remains constant over the period of analysis. In this study, we constructed a stochastic volatility model for interest rates. In our model we assumed not only that interest rate process but also the volatility process for interest rates follows the mean-reverting Vasicek model. We derived the density function for the stochastic element of the interest rate process and reduced this density function to a series form. The parameters of our model were estimated by using the method of moments. Finally, we tested the performance of our model using the data of interest rates in Turkey.