Calibration and Parameter Estimation in Models › Key Parameters

The key parameters for the Vasicek model are:

• $\kappa$: Mean reversion speed. Determines how quickly the short rate returns to the long-term mean $\theta$.
• $\theta$: Long-term mean rate. The conditional mean approaches this level while the rate continues to fluctuate around it.
• $\sigma$: Volatility of the short rate. Controls the magnitude of random rate fluctuations.
• $r_0$: Current instantaneous short rate. The starting point for the rate process.