Exploring the CIR Model: Insights into Interest Rate Dynamics and Financial Applications

Introduction

The Cox-Ingersoll-Ross (CIR) model is a foundational framework in finance that captures the dynamics of interest rates through a stochastic process. Originally proposed in 1985, the model describes the evolution of interest rates as a mean-reverting process influenced by both deterministic and random factors. This report aims to explore the CIR model’s implications for understanding interest rate movements and its applications in various financial domains. By delving into the model’s characteristics, assumptions, and outcomes, this paper seeks to illustrate how the CIR model can inform investment strategies, risk management, and pricing of financial derivatives.

Main Body

The CIR model operates on the premise that interest rates are subject to fluctuation bu