The Cox, Ingersoll and Ross Model

Cox, Ingersoll and Ross (CIR) view the problem of interest rate modelling as one in “general equilibrium theory” [18]. Anticipation of future events, risk preferences, other investment alternatives and consumption preferences all affect the term structure. CIR make use of a general equilibrium asset pricing model to endogenously determine the stochastic process followed by the shortterm interest rate and the partial differential equation satisfied by the value of any contingent claim. Bond prices are then determined as solutions to this partial differential equation, contingent on the underlying short-term interest rate.