Modeling short term interest rates using the Vasicek and Cox–Ingersoll–Ross models
In modeling future uncertainties, the time value of money effect is often minimally addressed. Many models assume constant rates, leading to potential errors in financial instrument pricing. This study explores continuous-time interest rate models to capture future uncertainties of interest rates. Two stochastic interest rate models, the Vasicek and Cox–Ingersoll–Ross (CIR), will be adopted, and their forecast performance will be evaluated. Using the Maximum Likelihood Estimation (MLE), the models are fitted to Kuala Lumpur Interbank Offered Rate (KLIBOR) data (1-mo