For the Vasicek interest rate model with short rate process drt = K(θ-rt)dt + σ dWt, show that the bond price B(t,T,r) can be found as B(t,T,r)=exp[A(t,T)rt+Z(t,T)] for deterministic functions A(t,T) and Z(t,T). Find A(t,T) and Z(t,T).
Sep 21st 2012, 06:37 AM
Re: Vasicek model
You need to use the generalized form of Ito's lemma to get the integral portion for the non-random and random components. Do you know these identities? (I'm sure you have been given these by your lecturer/professor).