In finance, the Chen model is a mathematical model describing the evolution of interest rates. It is a type of "three-factor model" as it describes interest rate movements as driven by three sources of market risk. It was the first stochastic mean and stochastic volatility model and it was published in 1994 by Lin Chen, a Chinese-born economist and academic who holds an MA from Stanford University and a PhD from Harvard.

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  • In finance, the Chen model is a mathematical model describing the evolution of interest rates. It is a type of "three-factor model" as it describes interest rate movements as driven by three sources of market risk. It was the first stochastic mean and stochastic volatility model and it was published in 1994 by Lin Chen, a Chinese-born economist and academic who holds an MA from Stanford University and a PhD from Harvard. Different variants of Chen model are still being used in financial institutions worldwide. The dynamics of the instantaneous interest rate are specified by the stochastic differential equations: <math> dr_t = (\theta_t-\alpha_t)\,dt + \sqrt{r_t}\,\sigma_t\, dW_t,</math> <math> d \alpha_t = (\zeta_t-\alpha_t)\,dt + \sqrt{\alpha_t}\,\sigma_t\, dW_t,</math> <math> d \sigma_t = (\beta_t-\sigma_t)\,dt + \sqrt{\sigma_t}\,\eta_t\, dW_t. </math> In an authoritative review of modern finance, Chen model is listed along with the models of Robert C. Merton, Oldrich Vasicek, John C. Cox, Stephen A. Ross, Darrell Duffie, John Hull, Robert A. Jarrow, and Emanuel Derman and many others as a major term structure model. James and Webber devote a section to discuss Chen model in their book; Gibson et al devote a section to cover Chen model in their review article. Lund et al devote a paper to study and extend Chen model. Tauchen devote a paper to test Chen model and other models; Cai devotes the whole paper to test Chen model and other competing models of interest rates and concludes that Chen model performs 'the best'.
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  • August 2009
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  • In finance, the Chen model is a mathematical model describing the evolution of interest rates. It is a type of "three-factor model" as it describes interest rate movements as driven by three sources of market risk. It was the first stochastic mean and stochastic volatility model and it was published in 1994 by Lin Chen, a Chinese-born economist and academic who holds an MA from Stanford University and a PhD from Harvard.
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  • Chen model
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