FRM Part II · FRM Exam Part II · The Vasicek and Gauss+ Models
A risk analyst describes a Gauss+ model in which the short rate is driven by several Gaussian factors. Which feature most clearly distinguishes it from the one-factor Vasicek model?
The Gauss+ model uses several Gaussian factors with different volatilities and mean-reversion speeds, so yields at different maturities need not move perfectly together. This allows non-parallel curve changes, unlike one-factor Vasicek, where all rates are perfectly correlated. Negative rates remain possible in both models.
- AIt allows non-parallel changes in the term structure because several factors with different mean-reversion speeds and volatilities drive ratesCorrect
- BIt guarantees that the short rate can never become negative
- CIt assumes that interest rate volatility is proportional to the level of the rate
- DIt removes mean reversion so that rates follow a random walk
Explanation
Gauss+ models use several Gaussian factors, so shifts, slope and curvature type moves can occur with differing persistence. Vasicek has one factor, so all rates are perfectly correlated. The other options describe features that are not true of Gaussian models: negative rates remain possible, volatility is not level-proportional, and mean reversion is retained.
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