A New Approach to CIR Short-Term Rates Modelling

It is well known that the CIR model, as introduced in 1985, is inadequate for modelling the current market environment with negative short rates, r(t) . Moreover, in the CIR model, the stochastic part goes to zero with the rates, neither volatility nor long term mean change with time, or fit with skewed (fat tails) distribution of r(t) , etc. To overcome the limitations of the CIR, several different approaches have been proposed to date: multi-factor models such as the Hull and White or the Chen models to the CIR++ by Brigo and Mercurio. Here, we explain how our extension of the CIR framework may fit well to market short interest rates.