Modelling interest rates: Vasicek model explained (Excel)

Vasicek (1977) model is the foundational econometric technique for modelling and understanding the dynamics of interest rates as well as for forecasting their future values and volatility and has applications in monetary macroeconomics and bond risk management. Today we discuss the concepts behind the model and its Excel implementation. Econometrics is easy with NEDL!
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[@NEDLeducation]

You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7 Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation

[@pedrocolangelo5844]

Amazing as always. NEDL is a gift for everyone who studies econometrics.

[@siamgangte2826]

Briliant, Sava! Thanks for your generosity!! Please do another one with MLE approach, looking forward to it!

[@peterc.2301]

Amazing video Sava! Thank you so much! A video based on ML would definitely be a great idea indeed!

[@Shulk2021]

Incredible explanation and simplification

[@silentstorm718]

You're the man Sava!

[@batumeftun]

amazing as always. I stress again: NEDL is better then any Finance Master :D

[@davidgomezaldana9507]

Great video ! it helps a lot ! very specific and easy way to explein ! thanks

[@surendrabarsode8959]

Brilliant. Thanks Savva. Please do it for using MLE as well as videos on other interest rates models!! Your videos make complicated ideas simple and easy to understand.

[@NEDLeducation]

Hi Surendra, and many thanks for your comment! I am planning to record more videos on interest rate modelling, including with MLE.

[@surendrabarsode8959]

@@NEDLeducation Thanks Savva. If possible, please indicate books, articles etc. from where you pick up the formulas. It would help to link theory with excel practical examples you explain in the videos. Warm regards.

[@reubenmarfo9855]

@@NEDLeducationdo you have videos using MLE? Thanks

[@LudoIMSUPER]

Hell oThanks for the video, but when we do the OLS , we have to adjust the parameter according the time step ? I mean here is weekly observation then 1/52 ?

[@luigibombelli7577]

Thanks Sava indeed...prof.

[@MrMahankumar]

Hey man great!!!!!! I didn't even know about this model lol

[@ahmed.a.elbaqi2302]

how he acount the standerd error ?

[@shivampardeshi9977]

if p value is insignificant so what to do in that case?

[@ryandiedricks435]

Excellent videos! Can you do a video of forecasting GDP please?

[@amritdash3469]

How can we use this approach to build a term structure of rates with one set of parameters working across the tenors?

[@romeodaniels43]

please can you help me with how you calculated the coefficients *a* and *ab* and also the standard error and sigma

[@NEDLeducation]

Hi Romeo, and thanks for the question! These are retrieved from a LINEST function template which is almost always a go-to way for regression modelling in Excel. I am actually about to release a tutorial on the LINEST function itself very soon so you can see for yourself how the parameters and other regression outputs can be retrieved there generally (not only for the Vasicek model implementation).

[@ExpertMathematician]

What is the hypothese that used in p value?. Is it H0 : the data can be modelled by vasicek model?

[@diphl3694]

Thank you for the video it was really helpful! but what happens if the t-test is not significance? could the vasicek model still be used for an interest data set? (also what does it mean if parameters a, b and sigma are negative?)

[@mountaindrew_]

Hello! Shouldn't the gaussian error in the discretized form be scaled for the square root of DeltaT?

[@NWKastaways]

Would G12 cell (a convergence) be considered mean reversion speed?

[@NEDLeducation]

Hi Juan, and thanks for the question. Yes, absolutely, this is a correct interpretation of the parameter.

[@user-wg7nw3mh2e]

Is it possible to use GARCH to adjust the convergence parameter interest rate / inflation shocks?

[@NEDLeducation]

Hi, and thanks for the question! Yes, you could estimate the model combining GARCH and Vasicek mean-reversion, however this would require maximum likelihood estimation.

[@user-wg7nw3mh2e]

@@NEDLeducation ok I guess I would like to you to do the maximum likely estimations you suggested. Also what adjustments are needed to use daily frequency or even tick data? ( i suppose for tick data you'd need to transfer to python?)

[@gokselbilici605]

Wow, just wow. Thanks man🤗

[@NEDLeducation]

Hi Göksel, and glad you liked the video! Stay tuned for more videos on econometrics or check the playlist: kzbin.info/aero/PLE4a3phdCOav7rXE4RjOROGYBfdXHnIkJ

[@gokselbilici605]

@@NEDLeducation Yeap, subbed already ;) Btw, I wanted to experiment with my country interest rates but my excel function linest wouldn't work as an array, I activated it with Ctrl+Shift+Enter. Do you have any guesses why it didn't work? Because internet didn't help me much why :)

[@gokselbilici605]

Oh, just find a solution: using index :) like--> =INDEX(LINEST($C$3:$C$305;$D$3:$D$305;1;1);5;1)

[@NEDLeducation]

@@gokselbilici605 Yes, this is an absolutely amazing workaround :)

[@olivermohr417]

Doesn't Vasicek model require a lambda*sigma term (risk-premium) in its drift when calibrated to historical data?

[@arielmodesto4696]

# brasil congratulations your content is very top!!!! Yes Yes if you can make the model of how to use the vero semenhaça to compare the best model we thank

[@bharatkumar-tk5qb]

nice