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11/17/2008

Exercise about Cox-Ingersoll-Ross Model

The Cox-Ingersoll-Ross Model of interest rates assumes that the interest rate, r, is not deterministic, but satisfies the stochastic differential equation:This process is also known as a squared Bessel Process. The question is, we want to find out another SDE followed by a function of "r", say, r^(1/2), just like the following solution.

For more general functions, people can refer the work by Prof. Roger Brockett, from Harvard University.

[If you find something wrong about the above solution, you are welcomed to send an email to me.]
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