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Vasicek model - Bond price and volatility

Quantitative Finance Asked by actuarialboi9 on October 27, 2021

Why does the bond price under the Vasicek model increase as the rate volatility increases? What is the intuition behind this?

One Answer

Intuition is just that the bond price by definition is a convex function of the rates, and the expectation of a convex function increases with volatility. Note that this result is model independent.

Answered by Arshdeep on October 27, 2021

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