Yield Curve Shapes of Vasicek Interest Rate Models, Measure Transformations and an Application for..

We consider the yield curves that one- and two-factor Vasicek interest rate models can produce. As a result, we show that the two-factor Vasicek model can explain significantly more effects that are observed at the market than its one-factor variant. Among them are humped shapes independent of the interest rate level and the occurrence of dipped yield curves. We further explain how a general change of measure framework can be used to achieve a desirable evolution of the yield curve shapes over time. This has particular applications in chance-risk classification of pension products.

[1] Diez, F. and Korn, R. (2019), “Yield Curve Shapes of Vasicek Interest Rate Models, Measure Transformations and an Application for the Simulation of Pension Products.” working paper.