Skip to content

FRM Part II · FRM Exam Part II · The Vasicek and Gauss+ Models

A risk analyst describes the Gauss+ model used for term structure analysis. Which statement best characterizes its structure?

Gauss+ is a multi-factor Gaussian term structure model in which a few factors, some mean-reverting, drive the short rate and are calibrated to fit volatility and curve shape. It differs from single-factor Vasicek and permits negative rates, because the factors are normally distributed.

  1. AA single-factor model where the short rate reverts to a constant long-run mean with a constant volatility
  2. BA multi-factor Gaussian model in which a few factors drive the short-rate dynamics, with mean reversion in some factors, calibrated to match the empirical term structure of volatility and yield shapeCorrect
  3. CA model in which interest rates follow a lognormal process so that rates can never become negative
  4. DA model with stochastic volatility in which variance follows a separate square-root process

Explanation

Gauss+ is a Gaussian multi-factor framework: a small number of factors (typically a level-type and a slope-type factor, plus a nonlinear component) drive rates, and the parameters are chosen to fit volatility and yield curve features. Option A describes Vasicek, which is single-factor. Gaussian models allow negative rates, so C is wrong, and constant-volatility Gaussian factors rule out D.

Did you get it right without looking?

One question tells you little. A timed set on The Vasicek and Gauss+ Models shows your real accuracy, how long you take and where you lose marks.

Practise The Vasicek and Gauss+ ModelsFree diagnostic mock

More The Vasicek and Gauss+ Models questions