Chen Model

Chen Model is a mathematical model. The Chen Model deals with the interest rates and their development. The Chen Model is important in the context of finance. Lin Chen founded the Chen Model in 1996. Chen Model happens to be the initial stochastic mean. It is also the maiden stochastic velocity model.

Chen Model Description
The Chen Model could be described as being a certain kind of “one-factor model”. It could also be called a short rate model. There is a reason behind this. As per the Chen Model the interest rates go up or down because of market risk.

The Chen Model tries to identify the relationship of market risk with the interest rate trends.

Equational Representation of Chen Model

Following is the equational representation of the Chen Model:

drt = (φt – αt)dt + √rtσtdWt
In this formula:
dσt = (βt – σt)dt + √σtηtdWt, and
dαt = (ζt – αt)dt + √αtσtdWt

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Last Updated on : 1st July 2013

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