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Black Litterman Model Excel Download4/20/2021
The model allows us to model the evolution of short-term interest rates.The Vasicek interest rate model is extensively used to determine bond prices, model credit risk, and to price interest rate derivatives.The Excel spreadsheet can be found at the bottom of the page.
First, we have the standard deviation sigma, which sets the volatility of the short-term interest rate. These, together with sigma and the initial condition rt, describe all the dynamics in the model. It characterises the speed with which the simulated path goes back to b. This makes sense, since interest rates cannot go up indefinitely and do not go below zero for long periods of time either. Instead, interest rates tend to revert back to certain natural levels. Of course, given the recent financial crisis, we learned that negative interest rates can occur more frequently than we imagined possible. The big difference between these models and the Vasicek model is that the extensions such as the Cox-Ingersoll-Ross model address the problem that interest rates can turn negative under the Vasiceks model. To calibrate the model, analysts typically perform a simple ordinary least squares (OLS) regression using actual daily interest rate data. The Vasicek model calibration is not discussed, but can also be don using Excels solver features. Finally, we note that using the simulated interest rates, it is very easy to use the model to determine bond prices. The following figure illustrates how interest rates can be simulated using the model.
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