DEFINITION of 'Vasicek Interest Rate Model'
A method of modeling interest rate movement that describes the movement of an interest rate as a factor of market risk, time and equilibrium value that the rate tends to revert towards. This stochastic model is often used in the valuation of interest rate futures.
The Vasicek interest rate model values the instantaneous interest rate using the following equation:
dr_{t }= a(br_{t})dt +sdW_{t}
Where Wt is the random market risk (represented by the Wiener process)
t represents time
a(br_{t}) represents the expected change in the interest rate at t (drift factor)
a is the speed of reversion
b is the longterm level of the mean
s is the volatility at the time
INVESTOPEDIA EXPLAINS 'Vasicek Interest Rate Model'
The Vasicek interest rate model states that the movement of interest rates is affected only by random market movements. In the absence of market shocks (i.e., when dW_{t }= 0) the interest rate remains constant (r_{t} = b). When r_{t} < b, the drift factor becomes positive, indicating that the interest rate will increase towards equilibrium.

CoxIngersollRoss Model  CIR ...
A mathematical formula used to model interest rate movements ... 
Interest Rate
The amount charged, expressed as a percentage of principal, by ... 
Monte Carlo Simulation
A problem solving technique used to approximate the probability ... 
Derivative
A security whose price is dependent upon or derived from one ... 
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. ... 
Interest Rate Risk
The risk that an investment's value will change due to a change ...

Investing
Who determines interest rates?
In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest rate determination, the government's economic observers create ... 
Markets
The Uses And Limits Of Volatility
Check out how the assumptions of theoretical risk models compare to actual market performance. 
Investing
The Ups And Downs Of Investing In Cyclical Stocks
This strategy can be profitable but only if you know when to dump these stocks. 
Economics
Forces Behind Interest Rates
Get a deeper understanding of the importance of interest rates and what makes them change. 
Investing Basics
How Interest Rates Affect The Stock Market
Whether you're buying lunch, a home or a stock, you're influenced by interest rates. 
Personal Finance
How The U.S. Government Formulates Monetary Policy
Learn about the tools the Fed uses to influence interest rates and general economic conditions. 
Investing Basics
What Investors Should Know About Interest Rates
Understanding interest rates helps you answer the fundamental question of where to put your money. 
Active Trading Fundamentals
Bet Smarter With The Monte Carlo Simulation
This technique can reduce uncertainty in estimating future outcomes. 
Bonds & Fixed Income
Advanced Bond Concepts
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration. 
Options & Futures
What are the differences between divergence and convergence?
Find out what technical analysts mean when they talk about a market experiencing divergence or convergence and how they affect trading strategies.