EXPLORING THE COX INGERSOLL ROSS (CIR) INTEREST RATE MODEL: A COMPREHENSIVE ANALYSIS AND APPLICATIONS IN FINANCIAL MODELING Nerli Khairani, Elfitra, Sara Hikmayanti, Tiur Malasari Siregar
Universitas Negeri Medan
Abstract
This article presents a comprehensive analysis of the Cox Ingersoll Ross (CIR) interest rate model and explores its applications in financial modeling. The CIR model is widely used in the field of finance for modeling interest rates and has proven to be a valuable tool for understanding and predicting interest rate dynamics. In this study, we delve into the mathematical foundation and key features of the CIR model, including mean reversion, volatility, and the mean-reverting process. We examine its strengths and limitations, and provide insights into parameter estimation techniques for the model. Furthermore, this article highlights various applications of the CIR model in financial modeling. We discuss its use in bond pricing, option pricing, and risk management. Additionally, we explore the implications of the CIR model in portfolio optimization and asset allocation strategies. By utilizing the CIR model, financial analysts and practitioners can gain a deeper understanding of interest rate behavior and make informed decisions in investment and risk management. Through this comprehensive analysis and exploration of the CIR interest rate model, this article aims to contribute to the existing body of knowledge in financial modeling. It provides valuable insights for researchers, academics, and professionals in the finance industry who are interested in understanding the dynamics of interest rates and utilizing advanced modeling techniques for financial analysis and decision-making. Therefore we need an appropriate method to restrain the rate of development. The purpose of this study is to analyze comprehensively and its application in financial modeling.
