One Factor Model Limitations

[ActuaryStudentUK]

The notes say under limitations of one-factor models (for interest rates) that historically there have been periods of both high and low interest rates with periods of both high and low volatility.

Is this saying that volatility can be high or low regardless of how high interest rates are; or that at times of high interest rates, volatility is high and vice versa.

I'm just a little confused by the wording.

Is it just me or are there too many models in this course?

 

[Gareth]

i dont know about the core reading, but normally you want an interest rate model that will exhibit higher volatility for shorter durations, and lower volatility for longer durations (this is Rebonato's view).

Also the level of volatility should vary with the absolute level of the rates themselves - perhaps this is what the core reading is hinting at. The r^0.5 factor in C-I-R is there to achieve this, so that high rates lead to higher volatility, low rates lower vol.

 

[hi5]

The notes say under limitations of one-factor models (for interest rates) that historically there have been periods of both high and low interest rates with periods of both high and low volatility.

Is this saying that volatility can be high or low regardless of how high interest rates are; or that at times of high interest rates, volatility is high and vice versa.

I'm just a little confused by the wording.

Is it just me or are there too many models in this course?

Now is the time to just "Rote" learn...........there is no time left for understanding.......(thats what i think, and I am trying to cram as much as I can for the 3 hours of the exam)

My motivation........the repulsion from another resit!